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
10x PE Ratio: 1,540B = Rp477/share
15x PE Ratio: 2,310B = Rp715/share
- 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
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).