OREANDA-NEWS. Fitch Ratings Indonesia has assigned PT Japfa Comfeed Indonesia Tbk's (Japfa, A+(idn)/Negative) IDR3trn senior unsecured bond programme a National Long-Term Rating of 'A+(idn)'. The agency has also assigned a rating of 'A+(idn)' to the up to IDR1trn of bonds to be issued under this programme.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Improved Financial Profile: Japfa's profitability and leverage have improved since 2H15, driven by better demand-supply balance for the poultry industry in Indonesia. Japfa's EBITDA margin increased to 9.1% in 2015 and further to 12.7% in 1H16, from 7.2% in 2014. Consequently, Japfa's net debt to EBITDA leverage, which had jumped to 3.7x in 2014, has moderated to 1.7x in 1H16. Profitability for the company's main animal feed business segment has been resilient, while margins for its breeding and commercial farming operations improved significantly in 2015 following the government's measures to regulate chicken supply.

Healthier Market Conditions: The Indonesian government has taken steps to manage supply in the poultry market over the past year, after oversupply weakened prices for day-old chicks (DOC) and live birds in 2H14 and 1H15, which resulted in losses at producers, including small-scale farmers. Domestic poultry producers culled around 3 million birds (parent stock), following a government directive in October 2015. The Ministry of Agriculture has also now been formally given the authority to manage the domestic chicken supply.

Chicken demand growth in Indonesia improved to 3.8% in 2015, compared with a rate of less than 1% in 2013 and 2014, according to data by the USDA. Higher demand for broiler meat was likely driven by faster growth in overall government spending last year, as well as lower inflation. Fitch expects chicken demand in Indonesia to continue to increase as per capita poultry consumption is low and the agency expects GDP growth to accelerate.

Cost Pass-Through Ability: The animal feed business accounts for over 90% of Japfa's operating profit. Japfa is exposed to rising raw material costs, but this is mitigated by a strong ability to pass through cost increases to customers. This is due to the company's high market share and its ability to retain corn inventory and adjust output.

PT Charoen Pokphand Indonesia Tbk (CPIN) and Japfa together control about 50% of Indonesia's poultry feed market, and react similarly to increases in raw material costs by seeking to raise prices. Japfa's corn dryers also allow it to store dried corn for up to four months, providing some flexibility in production. The animal feed business lends stability to Japfa's earnings.

KKR Investment a Positive: Global investment firm KKR took a 11.98% stake in Japfa in August 2016, in its first direct private-equity investment in Indonesia. The transaction, which was conducted via a combination of non-pre-emptive rights issue and public purchase of Japfa's shares, injected IDR702bn of cash into Japfa, improving its liquidity ahead of the maturity of IDR1.5trn of bonds in January and February 2017. In addition, Japfa should benefit from KKR's strategic insights gained from its consumer product businesses in several countries, including poultry producer Fujian Sunner in China, and better access to institutional investors.

Moderate Leverage: We estimate Japfa's leverage to remain at around 2.3x in 2016-2017, based on our expectation that demand and supply in the Indonesian poultry market would remain balanced. Hence, a key risk to our forecast is lack of coordination among stakeholders in keeping supply growth in check, which could result in a reversion to the low profitability of 2014. A sharp rise in raw material costs could also restrict Japfa's ability to pass through costs, impacting credit metrics.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Japfa's animal feed sales volume to remain flat in 2016, and grow at 3% annually thereafter

- Average annual sales volume growth of 3%-4% for DOC and live poultry from 2016

- EBITDA margin of around 9%, similar to 2015 level

- Capex of around IDR1trn in 2016 and IDR700bn thereafter

- Japfa refinances its domestic and US dollar bonds

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include

- Leverage (net debt/EBITDA) remaining higher than 2.5x on a sustained basis (2015: 2.6x)

- Significant reduction in size of the animal feed segment, which is demonstrated in its share of total revenue falling below 30% (2015: 36%)

- Failure to adequately address upcoming maturity of its Indonesian rupiah bonds (in 2017) and US dollar bonds (in 2018)

Positive: Developments that may, individually or collectively, lead to a revision in the Outlook to Stable include:

- Leverage lowering to 2.5x or below on a sustained basis

- No material reduction in relative size of animal feeds segment

- Success in addressing maturities of the rupiah and US dollar bonds