Description

$23 Million market cap for a company with $700 MM in Sales and a normalized PE of 1x and EV/EBITDA of less than 3X? Take advantage of the re-rating of Indonesia as resolution in the coming days to the current political turmoil should initiate a positive cycle for revaluation, strengthening IDR, lower inflation, lower interest rates, higher stock prices. SHSA, given its valuation, is a theoretically low-risk way to play this unfolding situation.

While the valuation is compelling, this company trades with the IDR/$ rate as strengthening or weakening IDR produces large non-cash FX gains/losses. A strengthening IDR produces of 500 IDR eps for every 1000 increase in IDR/$ rate (non-cash - but what many local investors look at).

This was originally written about 2 weeks ago and since then the price has moved up from 675 IDR to 1250 IDR (on low volume).


Surya Hidup Satwa (SHSA) is the lead vehicle for Thailand-based Charoen Group¡¦s diversified agribusiness operations in Indonesia controlling the publicly listed companies Central Proteinaprima (CPPR) and Charoen Pokphand Indonesia (CPIN). We would like to highlight the following:

„X SHSA and its subsidiaries have restructured their debts in 1999/2000 clearing the way to rebuild the strong growth rates seen pre-crisis.
„X As SHSA's subsidiaries CPIN and CPPR are still operating at well below capacity, the company has the opportunity to maintain strong earnings growth without significant additional capital expenditures.
„X Demographics of one of the worlds largest and fasest growing populations couples with low current consumption patterns provide an excellent basis for long-term growth in SHSA's businesses.
„X While competitors including (Japfa and Sierad Group) are recovering from a very difficult position, these increased competitive pressures in the Feed business should be partially offset by volume growth and increased margins in the Shrimp business.
„X With SHSA trading at a normalized PE of 0.5 and EV/EBITDA of 2.3 to company offers a compelling discount to it potential valuation for 2002.
„X SHSA directly owned businesses (excluding CPIN & CPPR) have a low level of indebtedness, are attractive and highly profitable, and probably worth approximately IDR 3,655 alone.
„X Current Valuation (including the stakes in CPPR & CPIN) of IDR 7,051 per share based on an EBITDA multiple of 5x, conservative given the current economic and political uncertainty. The high potential growth rates would imply a higher multiple of up to 7x without the current uncertainty.


UPDATED VALUATION

For Surya Hidup Satwa, Tbk (SHSA), we can look at valuation from two standpoints:

1. Minimum Valuation: Valuation its stand-alone business plus it share of CPPR at current market value
2. Full Valuation: Valuation of stand-alone business plus CPPR's intrinsic value (quite different from the current market price).

Previously we have used more aggressive EV/EBITDA multiples of 7x. Given the current political and economic uncertainty multiples of 5x are considered prudent. In the long-run we feel the true valuation will be closer to 7x given the potential growth, but in the current environment it is better to err on the side of conservatism.

The Minimum valuation is shown in the table below which represents the 100% value of SHSA's directly owned businesses & debts plus its 52% share of CP Prima's market value:


Minimum Valuation

For table see pdf file www.horizon.vg/shsa2.pdf

As disclosed in the following pages in more detail, SHSA's direct businesses are an interesting mix of export and local currency businesses that limit the risk of further IDR appreciation or depreciation. Below we show the historical evolution of SHSA's directly owned businesses in IDR & $. As you can see, one of the few companies that has prospered during the crisis - and with sales of over $100 Million this is not a small business. The estimates for 2001 should be relatively conservative given that the 1Q01 results annualized equal sales of IDR 980 Bn and EBITDA of IDR 200 Bn.

It is interesting to note that at YE2002 it is probable that SHSA will have no direct debt and have a net cash position. CPPR is the highly indebted company in the group and adds volatility in the financial results due to the US$ debt and their currency gains & losses upon consolidation with SHSA. Theoretically SHSA could walk away from its huge investment in CPPR and still be worth 3,655 IDR per share - though we wouldn't recommend this. Using current FX rates you get an even higher valuation in IDR given the $ earning businesses.


For table see pdf file www.horizon.vg/shsa2.pdf

Below we show the Full Valuation of SHSA including the direct businesses and its investment in CPPR and indirect ownership of Charoen Pokphand. Note that a normalized PE of 10x would imply a substantially higher valuation of IDR 10,138.

Full Valuation Surya Hidup


For table see pdf file www.horizon.vg/shsa2.pdf

THE CHAROEN UNITS

While the other publicly listed Charoen units CPPR and CPIN also offer value relative to our estimated valuation. SHSA currently trades at the most pronounced discount. While CPIN offers substantially greater liquidity it trades much smaller discount to its target valuation and is less diversified.


VALUATION SUMMARY OF THE PUBLICLY CHAROEN UNITS


2002e Valuation using 5x EBITDA, IDR/US$ = 7500
Valuation Current Potential
Share Price Revaluation
SURYA HIDUP SATWA
(FULL VALUATION) 7,051 675 945%
CENTRAL PROTEINAPRIMA 2,652 395 571%
CHAROEN POKPHAND 999 550 82%
Source: Horizon Management Estimates


THE BUSINESS

PT Surya Hidup Satwa, Tbk (SHSA), was established in 1976 as PT Goldpoint Offset before being renamed PT Sumber Hidup Satwa in 1977 and finally taking on the current name in 1979.

The heart of its business is in the import and distribution of a comprehensive range of animal health products that include medicines, vaccines, antibiotics, vitamins, disinfectants and feed additives that are used in Indonesia¡¦s huge agribusiness and aquaculture industries. In addition to its unique position as the sole importer and distributor of the widest range of animal health products, SHSA produces its own brand of health products, and carries out licensed manufacturing at its plant in Jakarta. SHSA also has an important shrimp

Aside from being an operational company, SHSA is also a holding company with investments in subsidiaries with lines of business ranging from production and distribution of vegetable and fruit seeds; manufacturing of poultry, shrimp and fish feeds; operations of an integrated shrimp and farming venture; processing and cold storage of shrimp; and the processing and retailing of roasted and fried chicken.

SHSA, which was listed on the Jakarta Stock Exchange in 1995, is one of the few public companies in Indonesia¡¦s animal health products industry.



ANIMAL HEALTH PRODUCTS

The core business of importing, manufacturing and sales of animal vaccines, antibiotics, feed additives and disinfectants is carried out by SHSA, while the 100% - owned subsidiary PT Indovetraco Makmur Abadi (IMA) is involved in the importation and distribution of other animal health products including some aquaculture products. SHSA distributes exclusive brands made by the world¡¦s leading manufacturers, including Eli Lilly, Elanco Animal Health, Intervet International BV, Daiichi Pharmaceutical Co. Ltd. and the Kitasato Institute, to domestic farmers and strives to meet customers needs and to pursue its strategy as a one-stopped distributor, SHSA continues to manufacture custom-made and under license products through its factory which include diluent steril, diluent hog cholera and coccivit.

VEGETABLE AND FRUIT SEEDS

SHSA¡¦s seed business is carried out through its manufacturer PT Benihinti Suburintani (BISI) and distributor PT Tanindo Subur Prima (TSP). BISI offers a range of variety of vegetable and fruit seeds but focuses its operations on the breeding of quality hybrid corn that offers higher yield. TSP distributes seeds and agrochemical products that include fertilizer and pesticide.

AQUACULTURE

SHSA has also ventured into aquaculture through direct investment in PT Centralwindu Sejati (CWS) and indirect investment in PT Centralpertiwi Bratasena (CPB), respectively a shrimp cold storage and processor and a large scale integrated shrimp farming operator. Both subsidiaries market most of their products to the export market. Production and marketing of shrimp feed are carried out through CPPR¡¦s feedmill in Surabaya, East Java and CPIN¡¦s mill in Medan, North Sumatra. Adding to that, through indirect ownership in PT Centralpangan Pertiwi (CP Pertiwi) and CPIN, SHSA undertakes the manufacture and marketing of fish feed for domestic fish farmers.


CENTRAL PROTEINAPRIMA, TBK (CPPR)

Subsidiary PT Central Proteinaprima, Tbk (CPPR), in which SHSA haa a 52.43% interest is a major producer of shrimp feed, with interests in its own subsidiaries PT Charoen Pokphand Indonesia, Tbk (CPIN) and PT Central Agromina (CAM), leading producers of poultry feed and day-old-chicks (DOCs), respectively. PT Central Proteinprima is a leading manufacturer of quality shrimp feed for Indonesian farmers. Since its formation in 1989 through the merger of two of Indonesia¡¦s animal feed producers ¡V PT Proteina Prima of Semarang and PT Tunggal Eka Sakti of Surabaya ¡V CPPR has achieved substantial growth in terms of net sales and assets. While CPPR¡¦s principal activity is the manufacturer of shrimp feed, its annual net sales is made up by investments in aquaculture-based and agribusiness companies. These investments are represented by holdings in PT Centralpertiwi Bratasena (CPB), PT Charoen Pokphand Indonesia Tbk (CPIN) and PT Central Agromina (CAM). CPPR has a 50.1% stake in CPB, a vertically integrated mass shrimp producer, 55.3% in CPIN, an Indonesia¡¦s leading manufacturer of poultry feed, and 100% in CAM, a major poultry breeder and fish feed manufacturer. Through the equity in CPIN, CPPR owns 20% directly and 44.3% indirectly of PT Charoen Pokphand Jaya Farm (CPJF), Indonesia¡¦s largest breeder of quality Day Old Chick (DOC). Investments in these companies ¡V particularly in CPB ¡V provide CPPR with the opportunity to focus on the long-term development of the core aquaculture business. CPPR was listed on the Jakarta and Surabaya Stock Exchanges in 1990 and trades under the symbol CPPR.


CHAROEN POKPHAND INDONESIA (CPIN)

PT Charoen Pokphand Indonesia (CPIN) is an integrated agribusiness enterprise with a main focus of activities including the formulation and production of quality poultry feed and the breeding of poultry stock for the Indonesian market. Established in 1972 in Jakarta, CPIN has grown to become the largest producer of poultry feed in Indonesia with its existing production facilities in Jakarta and Balaraja in West Java, Sepanjang and Krian in East Java and Medan in North Sumatra. CPIN owns 80% stock in PT Charoen Pokphand Jaya Farm (CPJF), a company engaged in the breeding of broiler one-day old chicks (DOC). CPIN receives support in expertise and experience from Charoen Pokphand Group Thailand, one of the leading agribusiness companies in Asia with more than sixty years of experience. CPIN has listed all its shares at the Jakarta and Surabaya Stock Exchanges in 1991 with trading code CPIN.


FINANCIALS

For table see pdf file www.horizon.vg/shsa2.pdf

Catalyst

Resolution in the coming days to the current political turmoil in Indonesia should initiate a positive cycle for revaluation, strengthening IDR, lower inflation, lower interest rates, higher stock prices.