Fitch Ratings has affirmed PT Japfa Comfeed Indonesia Tbk's Long-Term Issuer Default Rating (IDR) at 'B+'.
The Outlook is Stable. Fitch has also affirmed Japfa's senior unsecured rating and the rating on the USD350 million senior unsecured notes due 2026 at 'B+' with a Recovery Rating of 'RR4'. At the same time, Fitch Ratings Indonesia has affirmed Japfa's National Long-Term Rating at 'A(idn)'. The Outlook is Stable.
Japfa's leverage has weakened in 2023, with 1H23 EBITDA margin dropping to 5.2% on a very weak 1Q23. We believe this is temporary, given improvements for day-old-chick (DOC) and live bird prices in 2Q23 that were sustained until mid-August 2023 on a series of government-mandated culling instructions. We therefore expect EBITDA net leverage, after proportionately consolidating some subsidiaries, to worsen to 3.5x, the level above which we would consider negative rating action, by end-2023. Nonetheless, we have affirmed the ratings as we believe the trajectory of prices will enable Japfa to improve leverage to below 3.5x by 2024.
However, parent company Japfa Ltd.'s (JL) weakening credit profile could start to constrain Japfa's credit profile. JL's weaker credit trend follows the spin-off of its Chinese dairy business and the current African swine fever (ASF) outbreak in Vietnam. Sustained weakness in JL's credit profile in the next 12-18 months could result in a downward rating pressure on Japfa's ratings.
'A' National Ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union.
Key Rating Drivers
Volatile Key Product Prices: We expect the low prices of DOC and live bird prices in 1Q23 will not be sustained in the next six to 12 months because of government-mandated culling initiatives. Up to August 2023, the government has instructed three rounds of mandatory culling, which not only covered hatching eggs but also parent stock. The culling of parent stock should provide more long-lasting support to market prices of DOCs and live birds. Prices are likely to remain stable until the end of 2023 on a combination of strong market demand and stable prices in July and August.
Lower Margin: We expect the weak 1H23 to push Japfa's EBITDA margin lower to 6.5%-7.0% for the full year, before gradually improving to above 8% by 2026. We do not expect the company to reach 10%-11% EBITDA margin in the next two-three years, a level seen in 2020 and 2021, due to rising production costs and volatile selling prices. We have assumed a small increase in corn and soybean meal prices, Japfa's two primary raw materials, in 2H23 and beyond 2023.
Japfa's EBITDA margin dropped to 1.8% in 1Q23 due to dropping prices of DOC and live bird in January and February. This margin was the lowest level since 3Q21, which was the peak of the Covid-19 pandemic in Indonesia when there were strict movement restrictions. By end-February, the government instructed a mandatory culling, resulting in prices recovering in March. Price improvements continued after another culling instruction was made in April, further supporting price recovery. This resulted in a significant improvement in EBITDA margin to 8.3% in 2Q23.
Leverage to Improve: Fitch estimates Japfa's EBITDA net leverage, after proportionately consolidating a number of subsidiaries, to improve to below 3.5x by 2024. The deleveraging trajectory is likely to be slower than we previously expected, with leverage remaining around 3.0x in 2025.
Price Support in Indonesia: Slow but sustained improvement in selling prices continuing beyond 2H23 and 2024 supports our leverage expectation. Still, it is likely that the 1Q23 weakness will decrease Japfa's leverage headroom in 2023. Even so, we do not believe this will be sustained, as the strengthened government oversight in the past few quarters will make it unlikely for prices to dip to a level as low as in 1Q23.
Stronger Subsidiary, Weaker Parent: Japfa can be rated up to two notches above the consolidated credit profile of its weaker parent, JL, due to 'Porous' access and control and 'Porous' ringfencing, in line with Fitch's Parent and Subsidiary Linkage Rating Criteria. Japfa's US dollar debt - around 35% of total debt at end-June 2023 - has some restrictions on dividend payment and affiliate transactions. This, coupled with Japfa's listing on the Jakarta stock exchange, provides a degree of ringfencing, in Fitch's view.
Japfa also raises its non-equity funding independently of JL. The parent has also shown its intention to keep JL's other animal protein operations separate from its Indonesian business in public presentations. This, together with a significant non-controlling presence, results in the 'Porous' access and control assessment.
Weak Parent Could Affect Rating: Prolonged weakness in JL's non-Indonesia business will put downward pressure on Japfa's ratings and credit profile. JL's financial performance has been hit by the ASF epidemic in Vietnam that has caused prices of swine to tumble. Vietnamese consumer demand for poultry and pork is also weak. The low prices for poultry and pork have not been able to cover the increased feed raw material and operational costs, affecting margins and internal cash generation. JL will also be more reliant on dividend from Japfa to support its non-Indonesian operations.
Scalable Capex: We continue to estimate Japfa's capex at IDR2 trillion from 2023 onwards. Part of the capex will be used to expand and modernise existing farms and facilities, and build new corn drying facilities. Japfa is also building a vaccine development facility in Vietnam to expand the market reach of its vaccine development subsidiary. Annual capex should include maintenance capex of around IDR500 billion-700 billion a year. Expansionary capex can be scaled back if current market conditions are not favourable. However, higher capex than our expectation will limit Japfa's ability to deleverage.
Derivation Summary
Japfa's IDR is well-positioned relative to that of Minerva S.A. (BB/Stable) and Frigorifico Concepcion S.A. (B+/Stable).
Minerva is one of the largest beef exporters in South America with export sales accounting for about 55% of revenue. Its profitability has been resilient despite high input costs, helped by its export orientation. Japfa's operations, on the other hand, are concentrated in Indonesia, which makes it vulnerable to policy changes and the supply-demand balance in the Indonesian domestic poultry industry. Minerva is also larger than Japfa, with EBITDA of around USD630 million in 2023 and lower EBITDA net leverage of around 2.5x. These factors support Fitch's assessment of a higher rating for Minerva.
Japfa is rated the same as Frigorifico, which is smaller with an EBITDA of around USD150 million-160 million by 2024. Frigorifico is also less vertically integrated than Japfa and is dependent on cattle supply from a third party. However, Frigorifico has better geographical diversification, with more than 60% of revenue originating from exports to various markets in South America and Asia. Japfa has better vertical integration, but its financial profile is slightly weaker than that of Frigorifico. Fitch expects Frigorifico's EBITDA net leverage to moderate to around 2.4x by 2024, against Japfa's 3.3x.
Japfa's National Long-term Rating is comparable with that of PT Samator Indo Gas Tbk (A(idn)/Stable), PT Bali Towerindo Sentra Tbk (A-(idn)/Stable) and Golden Agri-Resources Ltd.'s (GAR) subsidiaries, PT Ivo Mas Tunggal (A+(idn)/Stable) and PT Sawit Mas Sejahtera (A+(idn)/Stable), whose ratings are aligned with the consolidated credit profile of their parent company.
Samator Indo Gas is much smaller than Japfa with EBITDA of less than USD100 million, but is the industry market leader, commanding 45% and 75%-80%, respectively, of the industrial and medical gas markets. This enables Samator Indo Gas to have a much stronger customer bargaining position than Japfa. Samator Indo Gas' contracted sales account for a large proportion of revenue, providing medium-term visibility. This is in contrast with Japfa, which is highly exposed to volatile supply-demand dynamics in the domestic poultry market and raw material prices. These factors drive our assessment of the same rating for both entities.
Japfa's rating is higher than that of Bali Tower, reflecting the former's stronger market position in the domestic poultry market and its larger business scale. Bali Tower is a small tower company relative to its local telecommunication tower peers, with an EBITDA of less than USD100 million in 2023. We forecast Japfa to have EBITDA of around USD240 million in 2023 and it is the second-largest poultry company in the country.
GAR's subsidiaries are rated one notch higher than Japfa, reflecting their stronger market position, much better geographical diversification and larger business scale with Fitch-forecast EBITDA of more than USD500 million in 2024. GAR is the world's second-largest palm oil company based on planted area, which contributes a large proportion of its export revenue. GAR also has extensive trading and production operations in China and India, compared with Japfa's domestically focused operations. These factors counterbalance GAR's weaker financial profile with EBITDA net leverage of over 3.5x by 2024.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue growth of about 5% in 2023-2026;
A drop in EBITDA margin to around 7% in 2023, before gradually picking up to above 8% by 2026;
Total capex of IDR2 trillion a year from 2023;
Dividend payout ratio of 40% from 2023.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Japfa would be reorganised as a going concern in bankruptcy rather than liquidated. We have assumed a 10% administrative claim.
Our going-concern EBITDA assumption of IDR3.5 trillion reflects the volatility of the poultry industry in Indonesia with the current DOC oversupply situation. This is lower than three-year average EBITDA from 2020 to 2022 to allow for slightly weaker EBITDA margin than our forecasts.
We use a multiple of 5x that reflects the sector dynamics and Japfa's strong business profile as the second-biggest poultry player in Indonesia. We believe the company has strong growth prospects, given chicken is Indonesia's main protein source, supported by the country's growing middle-class population.
The going-concern enterprise value corresponds to a 'RR1' Recovery Rating for the senior unsecured notes after adjusting for administrative claims. Nevertheless, we rate the senior unsecured bonds at 'B+' and 'RR4' because Japfa's operating assets are located in Indonesia. Under our Country-Specific Treatment of Recovery Ratings Criteria, Indonesia is classified under the Group D of countries in terms of creditor friendliness and Recovery Ratings are subject to a cap at 'RR4'.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA net leverage, after proportionately consolidating minority stakes in a number of subsidiaries, of below 2.5x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage above 3.5x for a sustained period;
EBITDA/interest paid below 3.0x for a sustained period;
Sustained deterioration in JL's consolidated credit profile.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Japfa's liquidity is supported by a cash balance at end-June 2023 of around IDR1.5 trillion and undrawn bank lines of around IDR2.7 trillion at end-June 2023. This is against a much higher short-term outstanding loan balance of IDR6.1 trillion, which we expect will partially be rolled over, and current portion of long-term bank loans of IDR632 billion.
We also understand that Japfa is seeking to refinance its committed club deal loan with a total facility of IDR3 trillion that will mature in August 2024. We do not expect any significant hindrance for Japfa to refinance this maturing facility, supported by its satisfactory long-standing relationship with its bankers. Japfa had used around IDR1.3 trillion of this facility as of end-June 2023, but we understand that the company made some repayments in July.
Japfa has around IDR800 billion-1 trillion in long-term debt amortising in 2024 and 2025, which we expect will be paid by a combination of refinancing and internally generated cash. Other than the club deal loan, the next major maturity is in 2026 when its USD350 million notes are due. We regard Japfa's refinancing risk as manageable, supported by strong business growth prospects in the medium term, a moderate financial profile and flexibility, and proven access to diverse funding sources.
Issuer Profile
Japfa is the second-largest poultry company in Indonesia, according to the company's estimate, with market share of around 21% in the poultry-feed business and around 25% in the DOC market in 2021. Its operations include aquaculture. Japfa acquired PT So Good Food, a processed-meat manufacturer, from its parent company, JL in 2020, enhancing its vertical integration in the poultry value chain.
Summary of Financial Adjustments
Fitch calculates the ratio for rating sensitivities by proportionately consolidating Japfa's subsidiaries - PT Bumiasri Lestari, PT Iroha Sidat Indonesia, PT Sentra Satwatama Indonesia and PT Indojaya Agrinusa - to reflect their significant minority interests.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Japfa's ratings are aligned with the credit profile of JL under Fitch's Parent and Subsidiary Linkage Rating Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
PT JAPFA COMFEED INDONESIA TBK 
