December 14, 2016 / 5:41 AM / a year ago

Fitch Revises Japfa Comfeed's Outlook to Stable; Upgrades National Rating

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, December 14 (Fitch) Fitch Ratings has revised PT Japfa Comfeed Indonesia Tbk's (Japfa) Outlook to Stable from Negative. The agency has affirmed the Long-Term Issuer Default Rating at 'BB-'. Fitch Ratings Indonesia has also upgraded Japfa's National Long-Term Rating to 'AA-(idn)' from 'A+(idn)'. A complete list of rating actions is at the end of this commentary. The revision of Japfa's Outlook and upgrade of its National Rating reflects improved industry dynamics following intervention by the Indonesian government to address the demand-supply imbalance, lower leverage driven mainly by higher profitability and better liquidity. Apart from stronger cash flows, Japfa's liquidity has also been boosted by its bond issue in November 2016 and equity issuance in August 2016. This has alleviated repayment risks related to upcoming bond maturities in 2017 and 2018. 'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations. KEY RATING DRIVERS Better Market Conditions: The Indonesian government has taken steps to manage poultry supply since 2H15, after oversupply weakened prices for day-old chicks (DOC) and live birds in 2H14 and 1H15, which resulted in losses at producers, including small-scale farmers. Domestic poultry producers culled around 3 million birds (parent stock), following a government directive in October 2015. Fitch believes the industry is more sustainable now that the Ministry of Agriculture has been formally given the authority to manage the domestic chicken supply. Chicken demand in Indonesia has also risen healthily in 2015, and Fitch sees robust growth prospects as per capita poultry consumption is low and the agency expects GDP growth to accelerate. Higher Margins, Lower Leverage: Japfa's EBITDA margin widened to 14.5% in 9M16, from 9.1% in 2015, driven by improved market conditions. Profitability in the animal-feed segment improved while sales of day-old chicks returned to significant profit in 9M16 after losses in 2014-2015. Japfa's net debt-to-EBITDA leverage dropped to 0.9x at end-September 2016, from 2.6x at end-2015. We estimate Japfa's leverage will remain at around 1.5x, assuming EBITDA margin narrows from 2017. We also expect Japfa to continue to generate free cash flows and have healthy fixed-charge coverage of over 4x. Improved Liquidity: Japfa issued IDR1trn of bonds with tenors of three and five years in November 2016 under its IDR3trn bond programme. Global investment firm KKR took a 12% stake in Japfa in August 2016, which injected IDR702bn of cash into the company. These should allow Japfa to meet the maturities of IDR1.5trn of bonds in January and February 2017. The company is likely to need further refinancing to repay USD199m of bonds due in 2018. However, the risk of Japfa failing to secure refinancing is low because of its robust credit metrics and good access to diverse funding sources, in our view. Cost Pass-Through Ability: Japfa is able to mitigate its exposure to rising raw material costs through a strong ability to pass through cost increases to customers in the animal-feed segment. This is due to the company's high market share and its ability to retain corn inventory and adjust output. PT Charoen Pokphand Indonesia Tbk (CPIN) and Japfa together control about 50% of Indonesia's poultry feed market, and react similarly to increases in raw material costs by seeking to raise prices. Japfa's corn dryers also allow it to store dried corn for up to four months, providing some flexibility in production. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Animal-feed sales volume to rise by 3% annually from 2017 - Average annual sales volume growth of 3%-5% for DOC and live poultry from 2017 - EBITDA margin narrows to around 9% from 2017 - Capex of around IDR700bn from 2017 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Leverage (net debt/EBITDA) below 1.5x on a sustained basis (2015: 2.6x) - No material weakening of industry fundamentals and Japfa's market position Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Leverage above 2.5x on a sustained basis - Significant reduction in size of the animal-feed segment, which would be demonstrated in its share of total revenue falling below 30% (2015: 36%) - Failure to adequately address maturity of its US dollar bonds in 2018. FULL LIST OF RATING ACTIONS PT Japfa Comfeed Indonesia Tbk -- Long-Term Foreign-Currency IDR affirmed at 'BB-' and Outlook revised to Stable -- National Long-Term Rating upgraded to 'AA-(idn)' from 'A+(idn)' and Outlook revised to Stable -- Senior unsecured rating affirmed at 'BB-' -- US dollar notes issued by Comfeed Finance B.V. and due in 2018 affirmed at 'BB-' -- IDR1.5trn bonds due in 2017 upgraded to 'AA-(idn)' from 'A+(idn)' -- IDR3trn bond programme and IDR1trn of bonds issued under the programme upgraded to 'AA-(idn)' from 'A+(idn)' Contact: Primary Analysts Akash Gupta (International Ratings) Associate Director +65 67967242 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Bernard Kie (National Ratings) Analyst +62 21 29886815 PT Fitch Ratings Indonesia DBS Bank Tower Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Secondary Analyst Bernard Kie (International Ratings) Analyst +62 21 29886815 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. 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