November 22, 2011 / 6:49 AM / in 6 years

TEXT-Fitch rates Indonesia's Japfa 'A+(idn)'

(The following statement was released by the rating agency)

Nov 22- Fitch Ratings has assigned Indonesia’s PT Japfa Comfeed Indonesia Tbk (Japfa) a National Long-Term Rating of ‘A+(idn)’ with a Stable Outlook.

Japfa’s rating is supported by its strong market position as the second-largest, in terms of market share, in poultry feed, poultry breeding, and aquafeed in Indonesia, a demonstrated operating track record and an improving financial profile.

Japfa’s strong market position in Indonesia’s poultry sector is protected by high barriers to entry, and is underpinned by its national distribution network, vertically-integrated production and strong supplier relationships. Competition is concentrated, with Japfa and PT Charoen Pokphand Indonesia Tbk controlling more than 50% of supply.

Japfa’s improving financial profile is supported by growing revenues, an improving EBITDA margin, and low financial leverage. Fitch positively views Japfa’s business expansion, as is evident from its revenues rising to IDR13.9trn in FY10 (FY07: IDR7.9trn). Increasing scale and a vertically integrated model have resulted in operating EBITDAR margins improving to 12.6% in FY10 (FY07: 7.49%). As of 30 June 2011, leverage ratio as measured by net debt to EBITDA was 1.6x.

Fitch sees robust growth prospects for Japfa’s poultry products (given Indonesia’s per capita consumption of chicken as being one of the lowest in Asia) and improving per capita income.

However, Japfa rating is constrained by its exposure to both commodity and FX volatility. Also, the nature of a volatile low-margin business and the susceptibility of revenues to disease outbreaks are considered by Fitch to be major inherent business risks.

The Stable Outlook reflects Fitch’s expectation that the company will be able to maintain the current revenue momentum, generate an operating EBITDAR margin of 9%-10% (down from FY10 levels due to rising commodity prices), sustain positive cash flows from operations and limit net debt to operating EBITDAR to 2.0x.

Positive rating actions are not expected without a significant expansion in scale, in terms of revenues and assets, while maintaining the current credit profile. Negative rating actions may be taken if net debt to operating EBITDAR is consistently higher than 2.5x and if operating EBITDAR margin falls below 8% on a sustained basis. The latter would reflect Japfa’s diminished ability to pass on costs to end-customers, as well as a weaker business profile.

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