PT Japfa Comfeed Indonesia Tbk.

The stable outlook reflects our view that PT Japfa will maintain broadly stable debt levels amid less buoyant operating conditions. The stable outlook also reflects our view that the operating performance, financial profile, and spending strategy of the company's majority shareholder Japfa Ltd. will mostly track that of PT Japfa. We could lower the rating if we assess the credit quality of Japfa Ltd. to have weakened. Given PT Japfa's large contribution to the parent's consolidated revenues and EBITDA, we could lower the group credit profile if PT Japfa's FFO interest coverage falls below 4x on a sustained basis. This could materialize if the company's Indonesia operations weaken, with the EBITDA margin falling below 6.0%, and the company pursues expansionary

...Lower margins will offset volume growth as market conditions remain volatile. We expect PT Japfa Comfeed Indonesia TBk.'s EBITDA margins to be subdued at 10%-11% over 2019-2021. This is in line with the historical trend, except for 2018 which had exceptionally good margins of about 14%. The margin suppression is mainly due to fluctuating prices in the day old chick (DOC) and broiler segments. We believe government culling programs will help to regulate supply and support profitability. But the time lag between decline in product prices and active intervention by the government creates profit volatility. PT Japfa's capacity expansion plan will limit potential deleveraging. In our view, PT Japfa will continue to focus on expanding its capacity in the downstream segment over the next two years. This will help improve efficiency at its underutilized feed mills. We believe annual capital expenditure (capex) will be about Indonesian rupiah (IDR) 2.5 trillion in 2019, tapering to IDR2 trillion...

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