CIMB Securities noted in a report that Indonesia's poultry market has stabilized since the fourth quarter of 2015 after the Indonesian government had ordered the cull of millions of chickens to ease supply swings. Previously, the supply-demand chain had been disturbed and the low poultry prices had pushed many smaller local breeders out of business (a poultry price war occurred amid the oversupply). Although the nation's big players - Malindo Feedmill, Japfa Comfeed Indonesia and Charoen Pokphand Indonesia - were better equipped to weather the storm, they also felt the financial pressure.

The stable rupiah rate (against the US dollar) so far in 2016 is also an important factor. Around 80 percent of Malindo Feedmill's production costs are caused by the procurement of raw materials (particularly corn and soybean). The majority of these materials need to be imported from abroad (in US dollars). As such, a depreciating rupiah (the Indonesian rupiah depreciated sharply against the US dollar between mid-2013 and September 2015) has a negative impact on the company's corporate earnings. So far in 2016, however, the rupiah has been appreciating against the US dollar.

Another positive development is that Malindo Feedmill debt ratio is estimated to decline from 196 percent to 93 percent after the company's rights issue in November 2015. Proceeds from this rights issue are used to repay US dollar-denominated debt to Bank Central Asia (BCA) and Bank CIMB Niaga.

Lastly, Indonesians' purchasing power is expected to improve in 2016 amid expected accelerated economic growth. According to domestic and international institutions (including the Indonesian government, Asian Development Bank, World Bank, and International Monetary Fund) Indonesia's GDP growth will rise to between 5.0 - 5.3 percent (y/y) this year, up from a 4.8 percentage point growth pace in 2015.

Therefore, CIMB Securities advises investors to buy Malindo Feedmill stocks. CIMB Securities set its target price for Malindo Feedmill shares at IDR 2,000 per piece. So far this year, Malindo Feedmill's shares have fallen around 10 percent (whereas the benchmark Jakarta Composite Index has risen nearly 5 percent over the same period).

In 2015 Malindo Feedmill posted a net loss of IDR 63 billion (approx. USD $4.8 million), improving from a net loss of IDR 85 billion in the preceding year. The company's revenue, on the other hand, continued to rise over that period. Net losses in the years 2014-2015 is particularly due to an increase in foreign exchange losses and higher interest expenses.

Rudy Hartono Husin, Finance Director at Malindo Feedmill, said the company allocated around IDR 450 billion (approx. USD $34 million) for capital expenditure (capex) in 2016. Around 30 percent of capex will originate from the company's internal cash reserves, while the remaining 70 percent comes from bank loans. Capex will be spent on feedmill breeding boilers. Meanwhile, the company also plans to build an animal feed factory in South Sumatra.

Regarding the long-term prospects, Malindo Feedmill has ample room for growth as Indonesia's chicken meat consumption is still relatively low at around 10 kilogram per capita per year, well below the 13 kilogram per capita of chicken meat consumption in Vietnam or the 38-40 kilogram per capita figures of Malaysia and Singapore. Husin said higher minimum wages in Indonesia boost purchasing power and therefore chicken meat consumption should rise.

Malindo Feedmill focuses on the domestic market (particularly outside Java), not on export markets (as transportation costs are considered too high).

Future Projection Malindo Feedmill's Financial Highlights:

      2014    2015    2016F    2017F    2018F
Net Sales  4,502.1  4,775.0  5,395.0  6,009.0  6,560.0
EBITDA    142.7    376.2    681.4    821.7    978.3
Net Income (loss)
  (84.6)   (62.8)    202.4    303.1    415.9
P/E Ratio (x)      -     89.9     14.6      9.7      7.0
P/BV (x)     2.30     1.88     1.66     1.45     1.24

in billion IDR rupiah unless otherwise stated
Source: CIMB Securities (12/04/2016)