Consumer goods in EMs at <10 PE: Indofoods.

Updated: Apr 15

Let's continue our trip to Asia with Indofoods. I would like to announce by the way, that I have no connection Asia that is relevant with investing, and I have never been to Asia, except to Mediterranean Asia, which does not count here. I just have been fishing for quality and value everywhere, and I have a computer with ... an internet connection!

Indofoods is an Indonesian stock and has a complex structure:

The daughter company is called IndofoodsCBP, and is the consumer products company. It is the number one packet noodles company in Indonesia, it also sells Sauces, Snacks, Dairy, and Drinks.

Indofoods own 80% of IndofoodsCBP.

The rest of Indofoods business is pretty minor and not exciting, but hedges the business with notably an Agro division with Palm oil and Sugar, one Pasta/Rice division and one distribution division.

So, why I am interested in Indofoods instead of IndofoodsCBP? As always, the answer for a value investor is The Price.

We have a <10 PE, and about 5% dividend yield.

Consumer branded products in EMs generally trade between 20 and 40 PE ratio. So maybe there are issues? The answer is no.

The only issue is that it is Indonesian, or maybe people prefer the subsidiary, or it is too boring.

The business is majority owned by First Pacific, which I own too.

Characteristics:

• It is growing slowly but nicely, since 2015, net income to equity holders of the parent went from 3TR to 6.4TR rupiah, while the exchange rate to USD is down just a tiny bit.

• The dividend over the period doubled.

I expect the grow to continue, because the CBP subsidiary leveraged itself 3 times approx. to buy Pinehill, which sells Noodles in the Middle East, Africa and the Balkans. Pinehill is growing fast, and it was not a value buy, at 23 PE, but it will be accretive to earnings. ( https://www.firstpacific.com/wp-content/uploads/2019/12/FPC-Pinehill-presentation-2020-06-29.pdf ).

From that presentation the dividend policy is affirmed "Indofood pays 50% of net profit as dividends to shareholders", even thought they may focus on reducing debt first.

Indofood expects growth "ICBP sees a doubling of overall noodle sales over the next five years counting all markets, domestic and overseas"

More recently, it acquired from Pepsi the parts of the Fritolay joint ventures it did not own (Cheetos, Doritos, Lay).

The risk, is being taken out on the cheap, but First Pacific is quite leveraged, so I do not see it happening quickly.

The company is traded in Indonesia, is traded but is illiquid with a spread seller in Germany, and can be bought with an extra discount and some Philippines assets through the Hong Kong listed holding First Pacific.

I got both. It is not convenient to lose a bit on the spread on the illiquid shares, but losing 2-3% on a potential long term holding multibagger does not bother me at all.