Nov 22, 2016 10:50:17

Ultrajaya Milk Industry ($ULTJ): Key Beneficiary Of Growing Milk Consumption

We see a promising outlook for Ultrajaya – Indonesia’s largest ultra-high temperature (UHT) milk producer. Indonesia’s current milk consumption is low compared to its neighbouring countries. Ultrajaya is expected to reduce its dependency on imported raw materials by developing its own farms. Currently trading at an attractive 18x FY17F P/E (based on consensus estimates), its valuation is lower than peer average of 23x FY17F P/E. Key risks include forex and international raw materials price volatility.

¨ A very promising market. At 14kg per capita, Indonesia’s national milk consumption is significantly lower than neighbouring countries such as Thailand (34kg per capita) and Malaysia (54kg per capita). Ultrajaya Milk Industry & Trading Co (Ultrajaya) expects sales volume of milk to grow 10-15% pa in the long run driven by higher disposable income in Indonesia. Liquid milk is expected to grow at a faster pace compared to condensed and powder milk. As the market leader in liquid milk production, Ultrajaya expected to be a key beneficiary.

¨ Reducing its dependency on imported raw materials. Currently, more than 50% of its raw materials are imported. To reduce its dependency on imported raw materials, Ultrajaya is building a new dairy farm in North Sumatra and increasing the number of milking cows in its West Java farm. The new dairy farm in Sumatra targets to have 11,500 milking cows in the next five years. For the first phase of expansion, which should begin in 3Q17, the company is expected to start its operations with 2,000 milking cows which would gradually increase, along with the improvements in its logistics and distribution business.

¨ Strong balance sheet to support future expansion plans. Aside from the new dairy farm, Ultrajaya is also building a distribution centre and new manufacturing facility located in MM2100 industrial town, Cikarang, West Java. Its investments in the distribution centre is expected to be c.USD20m and the company is still finalising its plans for the new manufacturing facility. We are of view that Ultrajaya has a strong balance sheet and cash position to support its future expansion plans given that c.35% of its total assets are in the form of cash (c. IDR1.4trn) as of Sep-16.

¨ Competition in tea beverage segment to remain fierce. Indonesia’s ready to drink (RTD) tea market consists of more than 200 stock keeping unit (SKUs). Ultrajaya has only one SKU – Teh Kotak brand – which is the market leader in the RTDtea in cartoon pack with a 75% market share. To deal with competition, Ultrajaya’s strategy is to maintain its selling price and the quality of its product. This differs from its peers who mainly lower selling prices to gain market share.

¨ Attractive valuation. Ultrajaya is currently trading at an undemanding valuation of 18x FY17F P/E, lower than its peer average of 23x FY17F P/E. We like Ultrajaya as a long-term investment given its market leadership in the milk segment, strong balance sheet and extensive distribution network. Key risks include forex and international raw materials price volatility. (Andrey Wijaya)