MacQ Indofood: may surprise the market with a lower refinancing cost

Indofood’s share price has been under pressure since the company announced details of the Indolakto (a milk company) acquisition. The acquisition value was around US$350mn, around US$200mn of which had been funded with short term debt, taken in December when US$ liquidity was tight and borrowing cost expensive. That was perhaps the main reason why investors have not liked the deal, although on the surface Indolakto is looking like a great asset, to me at least.

But when Indofood reports its 1Q09 results in May, I suspect the Street could be positively surprised to learn that around US$140mn of the US$200mn short term debt has been refinanced into a 3-year facility, with a LOWER cost of between 5-6%, versus the 8-9% previously. Refinancing negotiation for the remainder of the debt is still ongoing.

It appears that the Street has underestimated the Salim group’s creditworthiness and strong relations with the banking circle, as one of the few business groups that did not default during the 1997 Asian crisis. Based on a consensus EPS of Rp130 for FY09, the stock trades on 7.4x P/E. Not Rated.

Why I think the stock is worth a closer look?
(1)Indolakto acquisition could enhance the medium term EPS growth outlook, as organic growth prospect of Indonesia’s milk industry is stronger than that of instant noodles.
(2)Going into 1H09 with a lower average input cost for wheat and skim milk, the main raw materials. EBIT margin may expand.
(3)A leveraged beneficiary if the domestic consumption is stronger-than expected, the Rp strengthens, and cost of debt coming down. So far the instant noodle sales volume for Jan-Mar is encouraging.
(4)Consensus EPS estimate on the CPO space (Indofood Agri & London Sumatera are Indofood’s subsidiaries) has yet to reflect the higher CPO prices of late.
(5)Big acquisitions unlikely in the foreseeable future. Having purchased London Sumatera (LSIP IJ) and Indolakto (Not Listed), the year-end 2008 balance sheet could have reached its limit at 168%. Investors can now assess what they are really buying when the buy Indofood, without fearing unexpected acquisitions.