SINGAPORE (May 20): Dear Board of Directors, As a long-term investor in Indofood Agri Resources (IndoAgri), I am disappointed that you are recommending that I accept the offer from Indofood Sukses Makmur (Indofood). The offer price of 28 cents per share significantly undervalues the long-term potential of the assets held by IndoAgri, in my view. Instead of encouraging minority investors to accept such a paltry offer, you ought to be working to address our company’s obviously depressed market valuation in a manner that is fair and reasonable to all its shareholders.
Before I go any further, let me first say that I have no expertise in the agribusiness field and am in no position to second-guess business decisions taken by IndoAgri’s board and management. I bought shares in IndoAgri some years ago because I thought it to be a well-run company operating in a promising sector, and that its shares appeared to be reasonably priced.
Since then, I have watched IndoAgri expand its operations, and branch into the sugar business in Brazil, all while maintaining its financial soundness. Of course, I am disappointed with the recent deterioration in IndoAgri’s profitability, and the steep decline in its share price over the last few years, which have been attributed to weak commodity prices. I had plenty of opportunity to sell, but I chose to hold on.
Let me also say that I have no quarrel with Indofood. The fact that it is a dominant shareholder of IndoAgri was never a secret, and all investors — large or small — will ultimately act in their own best interests. In my view, the shareholders of Indofood will benefit greatly if the company succeeds in taking IndoAgri private at 28 cents per share.
Finally, I am quite certain that the directors of IndoAgri have ticked all the required boxes in their handling of the offer from Indofood. That includes engaging a qualified independent financial adviser, and ensuring that all necessary disclosures have been made. Minority investors have also been specifically warned that the offeror does not intend to do anything to preserve the listing status of the company, and that we could be left holding unlisted shares if we do not accept the offer.
To be honest, this warning was a surprise to me, as I understood the offer to be conditional on the offeror’s ending up with more than 90% of IndoAgri’s shares, at which point it would compulsorily acquire the rest of the company’s shares at the same price. But IndoAgri’s circular to share holders explains that the company could end up with insufficient free float to remain listed even if the offeror fails to achieve the compulsory acquisition threshold of 90%.
This is a risk that I am prepared to take. Even if I find myself trapped in the unlikely limbo described above, I find it hard to believe that the offeror would not eventually come to terms with me. Why wouldn’t it? IndoAgri is facing strong industry headwinds, but it’s far from going bust. Is Indofood really going to live with the inconvenience of not having full ownership of IndoAgri just to spite a minority investor who had the temerity to reject an obviously low-ball offer? Are companies belonging to the Salim Group so bereft of class and magnanimity? Surely not.
Unfair and opportunistic
The directors of IndoAgri who are recommending that minority investors accept the offer were informed by the opinion of the appointed independent financial adviser, Novus Corporate Finance. While I clearly do not agree with the recommending directors of IndoAgri, I found the IFA’s research to be helpful in reaching my own decision to hold on to my IndoAgri shares.
In particular, the offer price of 28 cents per share is equivalent to only 0.35 times Indo Agri’s book value of 79.8 cents per share as at March 31. The IFA looked at 23 other privatisation and delisting transactions over the past couple of years, and the only one that was done at a lower price-to-book valuation was Weiye Holdings’. This company was delisted last year with an exit offer price of 65 cents per share, or 0.3 times its book value. Weiye maintained its listing in Hong Kong, however, and investors who refused the exit offer in Singapore had their shares automatically transferred. Minority shareholders of IndoAgri have no such option to remain invested in their company.
It should also be pointed out that the exit offer price for Weiye was more than 30% above the last traded price prior to announcement of the delisting exercise, and more than 40% above its volume-weighted average prices over the preceding one, three and six months. By comparison, the 23 precedent privatisation and delisting transactions were done at prices that were on average 34.6%, 38.1% and 39% above the relevant companies’ VWAPs in the preceding one, three and six months respectively. The offer price for IndoAgri is only 21.5%, 26.3% and 29% above its VWAPs in the preceding one, three and six months, respectively.
The offer price for IndoAgri is also low compared with the market valuations garnered by comparable locally listed companies, including Bumitama Agri, First Resources, Golden Palm Resources, Golden Agri-Resources and Kencana Agri. According to the IFA, these five companies have, on average, enterprise values equivalent to $12,316 per hectare of planted land, and 15.26 times (excluding Kencana) their earnings before interest, taxes, depreciation and amortisation. By comparison, the offer price for IndoAgri implies an EV/hectare of only $8,560 and an EV/Ebitda of 11.11 times.
To be sure, IndoAgri appears to be less operationally productive than its locally listed peers, according to statistics collated by the IFA. Last year, IndoAgri achieved fresh fruit bunch yield of 15.2 tonnes per hectare and crude palm oil yield of 3.2 tonnes per hectare, which was lower than all five of the comparable companies. Moreover, Indo- Agri’s financial performance has been deteriorating.
For FY2018, it reported a 10.8% decline in revenue to IDR14,059.5 billion, and a net loss of IDR221.8 billion versus a net profit of IDR447.3 billion in 2017. For 1QFY2019, the company reported a 5.3% rise in revenue to IDR 3,358.2 billion ($318.2 million), and a net loss of IDR57.8 billion versus a net profit of IDR49.8 billion for 1QFY2018.
Yet, the way I see it, a lot of this weakness is because of soft commodity prices, which means this is simply the wrong time for long-term investors like me to part with shares in IndoAgri. Indeed, it is perhaps not surprising that Indofood has chosen this particular moment to attempt to take Indo- Agri private. While the IFA says the financial terms of the offer are “not fair, but reasonable”, my own view is that the offer is not fair, and opportunistic.
A fair and reasonable proposal
It is my hope that a sufficient number of minority investors will join me in rejecting the current offer for IndoAgri to prevent the company from being delisted. I also hope they will join me in calling for the board to immediately begin taking steps to help us realise the underlying value of IndoAgri’s assets.
There is clearly little investor appetite in the local market for IndoAgri in its current form. In fact, its market capitalisation, even after being boosted by the current offer by its parent, is less than the market value of its 73.46% stake in its main operating subsidiary, Salim Ivomas Pratama, which was listed separately in Jakarta back in 2011. SIMP currently has a market capitalisation of about IDR5,788.8 billion. IndoAgri’s market capitalisation, at 28 cents per share, is about $391 million.
The IFA noted in its letter to the recommending directors of IndoAgri that it is unlikely that the value of SIMP would ever be realised through a cash sale. So, I will not suggest such a move. In any case, this isn’t a good time to attempt realising the value of SIMP, because its share price has been trending down. Instead, to unlock the underlying value of IndoAgri, I propose that the Jakarta-listed SIMP shares held by IndoAgri be distributed in-specie to its shareholders.
Indofood and its subsidiaries, which currently own 74.34% of IndoAgri, would still maintain control of more than 54.6% of SIMP’s shares. Indofood could choose to buy more SIMP shares in the market, if it felt the need to further consolidate this dominant position, effectively taking advantage of SIMP’s currently weak share price. Meanwhile, minority shareholders of IndoAgri would have the option of realising the full market value of the SIMP shares distributed to them.
With SIMP separated from it, IndoAgri’s market value will shrink considerably. But it will certainly not fall below zero, which is what its current share price implies. Its remaining assets would comprise a 35% stake in CMAA, a 50% stake in Canapolis and an effective 18.9% interest in Roxas Holdings. The value of these entities could be realised through sales at appropriate valuations to various units of the Salim Group or its partners.
A small portion of the cash from these divestments could be used to retire off any directors and senior managers of IndoAgri whose services will no longer be required, assuming they do not concurrently hold positions at other Salim Group entities. Perhaps the listed shell could then be used by another business with a better chance of gaining an enthusiastic investor following in the local market. IndoAgri was, after all, the second reincarnation of this listed company. It was previously known as CityAxis Holdings, and ISG Asia before that.
I trust the board of IndoAgri and my fellow shareholders will give serious consideration to the points I have made in this letter, and begin working to unlock the underlying value of our company in a manner that is both fair and reasonable to all of us.
This story appears in The Edge Singapore (Issue 882, week of May 20) which is on sale now. Subscribe here
