Indofood CBP: Shedding More Light On Proposed Acquisition
- Indofood CBP's proposed acquisition of Pinehill Company is unfavorable in my opinion, given the high acquisition P/E multiple and the increased debt burden.
- Indofood CBP's 1Q2020 financial results were strong, which validates the company's status as a defensive consumer staple.
- Indofood CBP trades at 18.5 times consensus forward next twelve months' P/E, and it offers a consensus forward FY2020 dividend yield of 2.4%.
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I maintain a Neutral rating to Indonesian consumer branded products company PT Indofood CBP Sukses Makmur Tbk (OTCPK:PIFFY) (OTC:PNDFF) [ICBP:IJ].
This is an update of my initiation article on Indofood CBP published on February 20, 2020. Indofood CBP's share price has declined by -16% from IDR11,000 as of February 19, 2020 to IDR9,200 as of July 1, 2020 since my initiation. Indofood CBP trades at 18.5 times consensus forward next twelve months' P/E, which represents a discount to its historical three-year and five-year mean consensus forward P/E multiples of 23.8 times and 24.2 times, respectively. The stock also offers a consensus forward FY2020 dividend yield of 2.4%.
Indofood CBP's proposed acquisition of Pinehill Company is unfavorable in my opinion, given the high acquisition P/E multiple, the increased debt burden, and the fact that the transaction does not require the approval of independent shareholders.
On the flip side, Indofood CBP's 1Q2020 financial results were strong, which validates the company's status as a defensive consumer staple. Also, with the stock trading at a discount to its historical average P/E multiples, negatives associated with the proposed acquisition of Pinehill Company are priced in to some extent.
As such, I retain my Neutral rating on Indofood CBP. There is potential upside, if Indofood CBP can secure new acquisition debt at a lower-than-expected interest cost.
Readers have the option of trading in Indofood CBP shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers PIFFY and PNDFF, or on the Indonesia Stock Exchange with the ticker ICBP:IJ. For shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.
For shares listed in Indonesia, there are limited risks associated with buying or selling them in terms of trade execution, given that the Indonesia Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $8 million, and market capitalization is above $7.4 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own Indofood CBP shares listed in Indonesia include Matthews International Capital Management, The Vanguard Group, Norges Bank Investment Management, and BlackRock, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.
More Details Of Proposed Acquisition
In my initiation article on Indofood CBP published on February 20, 2020, I highlighted that the company announced that it proposed to acquire Pinehill Company Limited. Pinehill Company is a holding company, which has four subsidiaries that manufacture noodles in Saudi Arabia, Nigeria, Turkey, Egypt, Kenya, Morocco, and Serbia using the "Indomie" trademark. Indofood CBP's parent, PT Indofood Sukses Makmur Tbk (OTCPK:PIFMY) (OTCPK:PIFMF) owns the "Indomie" trademark, and licenses it to Pinehill Company's four subsidiaries.
At the point of announcement in February 2020, the market was concerned that the proposed acquisition will be expensive (acquisition price was not disclosed yet) and lead to higher interest expenses with additional debt financing, with an initial negative share price reaction for Indofood CBP post-announcement.
On May 22, 2020 and June 8, 2020, Indofood CBP made separate two announcements, respectively which provided more details of the company's proposed acquisition of Pinehill Company.
Indofood CBP is paying $2,998 million to buy Pinehill Company, of which $300 million will be funded by internal resources such as cash at hand or operating cash flow. The remaining $2,698 million relating to the purchase consideration will be financed by debt.
Pinehill Company provided a profit guarantee that the average annual net profit after tax for FY2020 (YE December) and FY2021 will be at least $128.5 million. If Pinehill Company's average FY2020/FY2021 earnings fall short of the profit guarantee by more than -5%, Indofood CBP's acquisition price for Pinehill Company will be adjusted downwards accordingly. Indofood CBP will set aside $650 million from the total purchase consideration, which will only be paid on April 30, 2022 or later after Pinehill Company reports its FY2020 and FY2021 financial results.
The Extraordinary General Meetings relating to the proposed acquisition of Pinehill Company will be held on July 15, 2020 and July 17, 2020 for Indofood CBP and First Pacific Company Limited (OTCPK:FPAFY) (OTCPK:FPAFF) [142:HK], respectively. Mr. Anthoni Salim has a 44% deemed interest in First Pacific Company Limited (OTCPK:FPAFY) (OTCPK:FPAFF) [142:HK], which owns a 50.1% equity interest in PT Indofood Sukses Makmur Tbk. Indofood Sukses Makmur is Indofood CBP's largest shareholder with a 80.5% equity interest, while Mr. Anthoni Salim has an indirect 49% stake in Pinehill Company.
Assessing The Proposed Acquisition
Indofood CBP's proposed acquisition of Pinehill Company is unfavorable in my opinion, due to three key reasons.
Firstly, the acquisition price is relatively expensive, implying a historical FY2019 P/E of 69.4 times, and a forward P/E of 23.3 times (based on profit guarantee of average annual net profit after tax for FY2020 (YE December) and FY2021 amounting to $128.5 million).
In contrast, Indofood CBP is valued by the market at P/E multiples in the high teens. Furthermore, most of Pinehill Company's food & beverage peers, which operate in the markets which Pinehill has a presence in, trade at below 20 times P/E.
Peer Valuation Comparison For PineHill Company
|Stock||Trailing Twelve Months' P/E||Consensus Forward Next Twelve Months' P/E|
|Nestle Nigeria PLC [NESTLE:NL]||22.6||19.6|
|Tiger Brands Ltd [TBS:SJ]||10.9||16.0|
|Famous Brands Ltd [FBR:SJ]||10.6||8.6|
|Almarai Co JSC [ALMARAI:AB]||28.7||27.3|
Secondly, Indofood CBP needs to take on additional debt amounting to approximately $2,698 million or IDR38 billion to finance the proposed acquisition of Pinehill Company.
Indofood CBP is currently in a net cash position of around IDR7.4 billion as of March 31, 2020. The company's financial position will weaken and its gross debt-to-equity ratio could potentially rise above 100% with the additional debt financing.
The all-in-cost (interest costs, currency hedging and other related expenses) for Indofood CBP's acquisition debt will determine if the proposed acquisition of Pinehill Company is earnings accretive, considering the fact that Indofood CBP's P/E is lower than that of Pinehill Company.
Thirdly, Indofood CBP's proposed acquisition of Pinehill Company does not require the approval of independent shareholders, contrary to earlier expectations. This is the case, despite the fact that this is a related party acquisition.
Strong 1Q2020 Results
Putting the proposed acquisition aside, defensive consumer staples such as Indofood CBP are favored by investors during uncertain times like these. The company's strong 1Q2020 financial results show how resilient its businesses are.
Indofood CBP's revenue increased by +7% YoY from IDR11.26 trillion in 1Q2019 to IDR12.01 trillion in 1Q2020, while the company's core net profit grew +15% YoY from IDR1.37 trillion to IDR1.57 trillion over the same period. Demand for noodles, dairy and snacks tend to be more stable than other consumer discretionary products. Pantry stocking and favorable commodity were also positive contributors to Indofood CBP's strong earnings growth in 1Q2020.
Looking ahead, market consensus expects Indofood CBP's revenue and earnings to grow by +7% and +14% YoY, respectively. A larger proportion of companies will be thankful if they are not loss-making this year due to Covid-19. Indofood CBP is an outlier which is almost assured of positive top line and bottom line growth, thanks to its leading 19.4% market share in the rice, pasta & noodles market in its home market, Indonesia.
Although Indonesian consumers are likely to cut back on their purchases this year due to economic woes brought about by Covid-19, necessities like instant noodle will be negatively impacted to a much lesser degree compared with most other household purchases.
Valuation And Dividends
Indofood CBP trades at 18.9 times trailing twelve months' P/E and 18.5 times consensus forward next twelve months' P/E based on its share price of IDR9,200 as of July 1, 2020. As a comparison, the stock's historical three-year and five-year mean consensus forward P/E multiples were 23.8 times and 24.2 times, respectively.
Indofood CBP offers consensus forward FY2020 and FY2021 dividend yields of 2.4% and 2.7%, respectively.
The key risk factors for Indofood CBP include a failure to realize synergies from the proposed acquisition of Pinehill Company Limited post-integration, a spike in commodity prices which depress the company's profitability, and weaker-than-expected revenue growth with Covid-19 being a drag on Indonesia's economy.
Note that readers who choose to trade in Indofood CBP shares listed as ADRs on the OTCBB (rather than shares listed in Indonesia) could potentially suffer from lower liquidity and wider bid/ask spreads.
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