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TPS Food (AISA) is a consumer goods company with two divisions, Rice division and Food Manufacturing division. The Rice division sells branded rice under Ayam Jago and Maknyuss. Meanwhile, the Food Manufacturing division produces brands such as Bihunku, Ayam2Telor, Mie Kremezz, Taro, and other biscuits.

PT Indo Beras Unggul Scandal

At July 2017, PT IBU which is a subsidiary of Dunia Pangan (in which AISA owns 70% of) had its warehouse searched by police, as it was alleged that they sold subsidised rice at a premium price. AISA’s actions are a big problem for the government because of the government’s wishes to control the price of staples, one of which through subsidised rice.

It seems that the criminal investigation is not continued, which might be helped by the fact that one of AISA’s commissioner is a former Agriculture Minister.

However, AISA’s rice division suffered a huge impact on its reputation from this scandal. As we can see from AISA’s recent 9M17 Financial Statements, AISA’s rice division experienced a loss of Rp110B in the 3rd quarter of 2017 alone (looking from earnings attributable to the non-controlling interests, which represents the 30% stake in Dunia Pangan).

The Concern: Large amount of Debt

AISA currently has Rp4,404B in debt, which translated to Rp445B in interest expense annually. According to Note 33 in the financial statements, the Rice division incurs Rp153B in interest expense annually, with Rp59B p.a. for the Food Manufacturing Division, and Rp211B p.a. from corporate debt. With this much leverage, if AISA loses its earnings power, they might not be able to cover their interest expenses or earn a sufficient return on their equity.

Divestment of Rice Division

AISA’s plan to divest its Rice division has been approved by its shareholders. Next, it will need approval from its creditors.

The concerning fact is whether AISA will be able to divest its rice division and receive cash, which AISA desperately needs because it has around Rp900B worth of bonds and Sukuk Ijarah it needs to pay back by April 2018. Currently, there are rumours that it will be sold to an affiliate company PT Jom Prawarsa Indonesia (JOM), which is owned by AISA’s CEO Joko Mogianto. If this is the case, there will be further concerns over AISA’s liquidity and solvency. Currently, AISA has not received the cash that it is supposed to receive from the sale of its plantation division (GOLL) in 2016. The deadline of the payment was at 30 September 2016, and because until now it has not been paid yet, PT JOM incurred a 10.25% penalty rate p.a. The same might happen if AISA’s stake in Dunia Pangan is sold to PT JOM, where the transaction value will be on the receivables in the balance sheet, and AISA will need to address its debt through other means.

How will AISA look after the divestment

Worst-case scenario

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10x PE Ratio: 1,540B = Rp477/share

15x PE Ratio: 2,310B = Rp715/share

Notes:

  • The above assumes that AISA retains its corporate debt, while the debt of the rice division goes away
  • The above assumes that AISA does not get any cash from the sale of the rice division (i.e. equity of the rice division is sold for Rp0)

Best Case Scenario

In this case, AISA’s rice division is sold for an EV Rp3,500B (fair value of rice division stated in the news), and AISA receives Rp2,000B in cash. In this case, AISA will be able to pay back Rp2,000B in debt, which will result its interest expense to fall to Rp70B. In this case, Net Income will be Rp304B p.a.

10x PE Ratio = 3,040B = Rp941/share

15x PE Ratio = 4,560B = Rp1412/share

My Take

In my opinion, AISA’s rice division will not interest buyers given its poor economics (price is regulated by the government) and the fact that AISA’s brand is damaged by the PT IBU scandal. As a result, I believe the worst case scenario is more likely. AISA’s valuation will largely depend on whether there is a willing buyer for its rice division who can provide cash to solve its liquidity and solvency problems. While its food manufacturing division looks healthy with good margins, their inability to get cash might destroy AISA’s overall performance.

Given the high uncertainty, I believe AISA is more of a speculation rather than an investment (which should guarantee a safe return).

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4 thoughts on “AISA: Down 75% YTD, Bargain or Value Trap?

  1. Hi,
    Kudos for the balance view and covering the downside.
    As compared to the vested interests who are mostly shouting on the upside (such is expected as the confirmation bias would has it).

    However, just on the assumption of your worst case numbers, since you have pointed out about the AR of GOLL divestment and the 10% fine.
    Since there is a doubt about the payment, wouldn’t it be safer to assume such income from the penalty as one-off item?
    The reason why I am particular of such item is the amount is significant to the bottom line (IIRC, it was 40m for 9mth)

    Note:
    I am well aware if the divestment AR is safe and totally no risk, they can use the amount to pay the bank and hence reduce the interest expense.
    But sensibly, unless the CEO is super nice and want to donate by paying 10% fine every year and bailout AISA shareholders, it is quite senseless.
    As such, to be on safe side, ask the CEO to “show us the money”.

    Surely, I am not vested, but keeping us on this.
    Interested in the restructuring and watching the show without paying the ticket.

    Like

    1. The reason why I included the income from the penalty was because I thought that had they received the cash earlier, and being able to pay back some of the debt, AISA would not have as much interest expense. However, I believe you are right, since this is a worst case scenario. And management’s track record does not convince me of their integrity, hence I agree that it probably should be taken out, unless we have confidence it is an amount that will be paid back. Thank you for your feedback.

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  2. I am agree with your view… It’s a lot of speculation to put our money on AISA right now… Management’s track record show no good integrity and even they have some problem of paying debt before the rice case (insider information).. dig a hole to cover another hole that is what their track record is…. I also have same thought’s about MTDL and I already put some money to buy the stocks… I believe we no need to wait for long time to achieve target price you mention, yes 900 is achievable
    Notes: what subject do you take in university and where do you study?

    Like

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