April 28, 2022


Fitch: PT Japfa Comfeed Indonesia Tbk has short-term buffer against high corn, soybean meal prices


PT Japfa Comfeed Indonesia Tbk's pricing power, EBITDA margin headroom and capex flexibility provide a buffer against the impact of high corn and soybean meal prices in the short run, said Fitch Ratings.


However, a prolonged increase in raw material prices will likely erode Japfa's rating headroom.


Increases in the prices of raw materials will squeeze Japfa's EBITDA margin. The prices of key raw materials like corn and soybean meal, whose procurement costs comprise more than half of Japfa's cost of revenue, increased in 2021 and continued to rise in 2022.


The World Bank reported in early April that the average price of soybean meal rose by 22% in 2021 while that of maize increased by 57%. In Q1 2022, the soybean meal price increased by 6% year-on-year while that for maize climbed by 25%.


Japfa's corn costs also increased in 2021, even though it procures the stock entirely domestically, due to issues in the domestic corn market's storage and distribution as the harvest time varies across Indonesia.


Japfa is usually able to pass on material price increase to end-customers. In 2021, it was able to pass on part of the increase in input costs, especially in its animal feed segment. However, there is some limit to Japfa's ability to adjust prices in 2022 without sacrificing sales volume, as its selling prices were already high in 2021.


Japfa's position as Indonesia's second-biggest producer of poultry feed and day-old chicks (DOC) could partly support cost pass through in 2022. Meanwhile, its vertically integrated operation could enable the company to take advantage of different levels of price elasticity along the poultry value chain.


There is little headroom in Japfa's leverage to withstand prolonged high input costs. Based on Fitch's assumptions of modest volume growth, slower price adjustment than 2021 and a 30% increase of average raw-material prices, it forecast 2022 net debt/EBITDA to reach 2.4x, below the negative sensitivity of 2.5x, after proportionately consolidating minority stakes in a number of subsidiaries.


Corn and soybean meal prices that are higher than Fitch's expectations or a weaker ability to pass on raw-material price increases than it estimated are main risks to its forecast. Japfa's leverage stood at 2.2x at end-2021. Its animal feed segment's gross revenue as a proportion of total gross revenue in 2021 was 41%, above the negative sensitivity of 30%.


Japfa's capex policy is therefore important to counter the possibility of higher leverage than Fitch's expectation. The company has some flexibility in its expansion capex, which can help contain leverage in 2022. Fitch expects Japfa's production capacity for all segments will be able to accommodate moderate volume growth in 2022 even in the absence of expansionary capex. However, higher overall capex than Fitch's expectation will use up internally generated cash and push leverage higher.


Japfa's shareholder return policy is also key to maintain its comfortable leverage amid higher raw-material prices.


- Fitch Ratings

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