Stock Analysis: FMCG — Dairy (2)

Photo by Myriam Zilles on Unsplash

Disclaimer: I am not a professional financial advisor. All financial opinions written in this article are from my personal research and experience, and it is not a recommendation to buy or sell the stocks.

Following previous post, I attempted to do some research on its competitor, a new fast-growing dairy company.

The product is advertised on every social media platform, is endorsed by a number of well-known influencers, and is available at every convenience store in the area. It’s nearly impossible to overlook the product.

Since it was booming in 2021, I’ve decided to research this stock and compare it to ULTJ’s performance. As you may recall from my previous post, ULTJ’s management stated that the milk industry is experiencing a shortage of demand due to the COVID-19 pandemic. However, when researching other competitors, I discovered a different result, which makes me doubt ULTJ’s ability to grow in the future.

Cisarua Mountain Dairy (IDX: CMRY)

A leading producer of Premium Dairy Products and Premium Consumer Foods in Indonesia.

The Company has 6 production facilities (which might be outdated):

• 3 facilities produce premium dairy products.
• 3 production facilities are dedicated to premium consumer foods, 1 located in Cikupa, and 2 are located in Semarang.

CMRY products. Source: Annual Report 2021.

CMRY products are divided into 3 segments (% of revenue contribution):

• Yogurt Drinks (47.5%): Cimory pouch, Cimory Greek Yogurt, Cimory Mini Yogurt, Cimory Yogurt Drink, Cimory Yogurt Drink UHT. Produced by: CIMORY / Company.
• Food (33.2%): sausages, chicken nuggets, luncheon meats, etc. Produced by: Subsidiaries, PT Macroprima Panganutama, and PT Java Egg Specialties.
• Milk Drinks (19.3%): Fresh Milk & UHT Milk. Produced by: CIMORY / Company.

Company Structure

Company Structure. Annual Report 2021.

PT Macroprima Panganutama

Established in 1992. Run businesses in the processing industry which include:

• industrial processing and preservation of meat and poultry meat products.
• minced meat and surimi-based industries.
• other confectionery industry.
• food and processed food industry.

Running a business in the field of wholesale and retail trade which includes wholesale trade on the basis of remuneration (fee) or contract.

PT Macrosentra Niagaboga

Established on 30 November 2004. Run businesses in the fields of food processing and canning industries. Trade-in food and beverages including export, import, local trade, good for calculations itself or for the calculation of others on a commission basis, also acts as an agent, wholesaler, supplier, and distributor of the said goods. Become agents, distributors, representatives (representatives), and suppliers of various companies, both in Indonesia at home and abroad for food and beverages.

PT Java Egg Specialities

Established on13 January 2006. Run businesses in the processing industry which include:

• Food product industries. Food and processed food industry. Food seasoning and flavoring industry. Food industry of chocolate and confectionery.
• Fruit and vegetable crushing industry.
• Milk powder and condensed milk processing industry.

Production Process — Yogurt

Production Process Yogurt Drinks. Source: Prospectus 2021.

Cimory Pouch. Source: Prospectus 2021.

The Company obtains fresh milk from local cooperatives and local farms, which the Company mixes with powdered milk obtained from international suppliers, before proceeding to the homogenization and pasteurization processes.

Then, The Company added bacterial cultures for incubation as well as sugar and stabilizers for further homogenization. Yogurt Products are then loaded into various containers including plastic bottles and disposable plastic cups and bags, packaged and stored for shipping.

Certain Yogurt Beverage Products undergo an ultra-pasteurization process and process additional aseptic filling instead of the usual filling process (CIMORY POUCH).

Production Process — Milk

Production Process Milk. Source: Prospectus 2021.

Fresh milkThe Company’s fresh dairy products require refrigeration and have a relatively short shelf life of 40 to 45 days. In order to meet the continuous demand of consumers To improve the freshness, taste, and quality of milk, the Company launched Cimory Fresh Milk 950ml in 2015, which targets the middle to the upper-class consumer market. Over time, the Company has introduced new flavors to meet market demands and currently, the Company offers 7 different SKUs.

UHT milkThe company packs 250ml UHT Milk and 125ml UHT Milk products in aseptic containers, which protect milk from air and light as well as extend its shelf life. Depending on the choice of packaging, the Company’s UHT Milk products are kept fresh at room for a period of 9 months to 12 months

Production Process — Food

The Company usually uses refrigerated or frozen raw chicken, beef, and seafood for produces the Company’s ready-to-eat products, which are cut, chopped, and mixed with spices and additives other. Process:

• Every week, the Company collects all raw poultry from large poultry management companies in Indonesia. The Company’s raw beef is imported from various suppliers in New Zealand and Australia.
• Depending on different processing procedures applied to certain products, the Company mixes meat and ingredients others chopped, kneaded, or preserved.
• The company then fills the mixed meat mixture into molds to shape the dough into a suitable final shape.
• Processed cooked or undercooked food products at different temperatures.
• After processing, cooked or undercooked food products are refrigerated or frozen and then packed.

The Company’s production process for pasteurized liquid egg products and general egg-based food supplements is as follows:

• Receipt of raw materials (eggs and various ingredients for complementary foods)
• Storage of raw materials
• Egg washing & egg-breaking
• Filtering is followed by temporary storage in storage tanks, pasteurization, packaging, and storage.

The main equipment in the Company’s Premium Consumer Food processing operations includes fryers, steam ovens, cutting machines, grinding machines, chopping machines, injection molding machines, smoking machines, automatic packaging machines, and cooling machines. Most of the Company’s main consumer food production equipment is imported from manufacturers in Germany, Japan, and China.

Supply of Raw Materials

• Main Raw Materials: Milk, Milk Powder, Chicken, Beef, and Sugar.
• Fresh Milk is bought from local cooperatives in Java.
• Powder Milk is imported from various suppliers in New Zealand, Australia, Europe, and United States. Bought six months in advance
• Raw Poultry is bought from major poultry management who have their own farms.
• Raw Beef is imported from various suppliers in Indonesia, New Zealand, and Australia. The company also buys sausage skins from partner companies, PT Macrotama Binasantika.
• Sugar is purchased from local importers
• Other raw materials such as stabilizers and flavorings from international suppliers

Inventory & Receivable

Inventory Turnover. Source: Annual Report 2018–2021.

Receivable Turnover. Source: Annual Report 2018–2021.

CMRY sold and replaced its inventory every 45–70 days. However, this is a calculation of mixed products, and yogurt and fresh milk products have a shorter shelf life outside the refrigerator, plus yogurt and fresh milk contributed more to their revenue, so this calculation might not be representing the CMRY inventory turnover ratio. Also, processed meat has a longer shelf life.

Cost Structure — COGS & OPEX

• Product mix changes contribute to decreasing the Cost of Sales as a % of Net Sales, with premium price points on newer product lines, namely Cimory Pouch and Kanzler Singles.
• Inflationary pressures stemming from COVID-19 are impacting supply chains globally, causing increases in the costs of imported Raw Materials & Packaging.
• The negative effects of inflationary pressures are being outpaced by the benefits of scale on fixed costs as sales volumes grow rapidly.
• OPEX: higher portion of selling and marketing costs, low and declining portion of general and administrative costs -> This is good because it means management is concentrating on selling its product rather than paying management more money.

Utilization & Production Capacity

Utilization (%). Source: Prospectus 2021.

Capacity (tonnes). Source: Prospectus 2021.

Currently, the Company’s growth has been limited by production capacity as consumer demand for the Company’s products has exceeded the Company’s production capacity.

In particular, in the six-month period ending June 30, 2021, the Company has received more purchase orders for the Company’s products than the Company can produce and deliver.

The Company purchased a number of production lines for the Company’s emerging Premium and Consumer Premium Dairy Products online on December 31, 2020.

What the management said about demand exceeding production capacity, in my opinion, is a little confusing. According to the information provided, the use of CMRY products is still below 70%. (usually the optimal number for production lines). This calls into question the company’s decision to invest in new production lines in 2021, using IPO funds to do so.

Distribution

Distribution Network. Source: Prospectus 2021.

Modern Trade (53%)hypermarkets, supermarkets, and minimarkets. 18.000 Indomaret & 15.000 Alfamart. Penetrates 95% of total outlets.

General Trade (24%)wholesalers, local supermarkets, minimarkets, small shops, and warungs. serving more than 50,000 general trading outlets through around 80 distributors as of June 30, 2021

Miss Cimory (12%)The number of MCM agents has grown from approximately 1,053 as of December 31, 2018, to more than 2,731 as of date June 30, 2021, reaching more than 200,000 households every week. MCM agents operate from “Miss Cimory Centers” specifically for the Company. The Company has 115 MCM Centers as of June 30, 2021, in 30 cities in Java, Bali, and Sumatra.

FSI (10%)fast-food restaurants and other FSI customers, including hotels, convenience stores, and cinemas. Has a higher portion before COVID.

Export (1%) & Ecommerce (?)(just started in 2021)

Marketing

The Company believes that digital media and social media such as YouTube, TikTok, Instagram, Facebook, and Twitter have significantly changed the media behavior of Indonesian consumers and have become a cornerstone of advertising and successful marketing.

The Company’s digital marketing strategy includes digital advertising as well as support from influencers. Since 2020, the Company has engaged more than 200 social media influencers to promote the Company’s products across platforms.

During the year 2020, and for the six-month period ended June 30, 2021, the Company made 195 and 998 posts on TikTok and reached 2,297,580,336 and 8,668,662,240 views, respectively.

Internet users in % of population. Source: Prospectus 2021.

Phone and Smartphone penetration. Source: Prospectus 2021.

The Company’s main target customer segments are customers aged between 18 and 35 years and first-class customers top with stronger purchasing power.

On average, they spend 7 hours and 59 minutes online, higher than the global average of 6 hours and 43 minutes in 2020. As things get better telecommunications infrastructure.

Why 18–35 years old?

Indonesia has experienced rapid urbanization, with its urban population growing from 142.4 million in 2016 to 156.5 million in 2020, which is a growth of 9.9% and a CAGR of 2.4%.

In 2020, urban residents represent 57.2% of the total population. Urbanization and rising incomes drive growth in Indonesia’s middle class and growth in consumer goods and services spending, including in tier 3 and 4 cities were growing rapidly.

Indonesia has a relatively young population with 50.4% of the population under 30 years of age compared to other Southeast Asian countries.

In 2020, the median age is 29.7 years. 67.8% of the population is aged between 15 and 64 years of age, which contributes to Indonesia’s sizable labor force and rapid urbanization. This segment of the population is also generally tech-savvy and tends to consume more digital services.

Market Shares & Competitors

Yogurt Product Market Shares. Source: Prospectus 2021.

Yogurt Product Market Shares. Source: Prospectus 2021.

Yogurt Product Market Shares. Source: Prospectus 2021.

For Yogurt Drink & Spoonable Yogurt, CMRY holds the top market share of 78.8%& 58.3%.

Competitors

• Greenfields (Brand A) & PT Diamond Cold Storage (Brand B)
• PT ABC Kogen Dairystepped in and launched the Kin brand in 2018.
• PT Yoyic Dairy Indonesia also introduced the Yoyic brand at the end of 2018.

As for Milk, CIMORY ranked 4th in Fresh milk and below the top 5 for UHT & Flavoured Milk sections. The top 3 Brands should be Ultra Jaya, Frisian Flag, and Indomilk.

Processed Food Market Shares. Source: Prospectus 2021.

Processed Food Market Shares. Source: Prospectus 2021.

Processed Meat

Top 3 players representing between 70 and 80% share market in 2020, coupled with many small manufacturers.

Processed Meat players face intense price competition due to low consumer loyalty, where consumers Indonesians easily switch brands to take advantage of promotions.

CompetitorsPT So Good Food* (Brand A) & PT Sierad Produce Tbk, Belfoods brand

Industry & Growth

Milk Industry Growth 2016–2025E. Source: Prospectus 2021.

• Flavored Milk, the largest dairy segment, fastest growth in 2016–2020 with a CAGR of 10.6%.
• UHT White Milk, the second-largest segment, growth with a CAGR of 8.8% from 2016–to 2020
• Fresh White Milk with a CAGR of 5.0%.
• The yogurt sub-category recorded growth with a CAGR of 33.3%.

The dairy category experienced strong growth in the review period due to a number of factors including:

• An increase in income is in line with the growth of the middle class.
• Increase in health awareness and well-being of consumers.
• Increased variety of products entering the market.
• Expansion of distribution channels.

Milk Consumption 2016–2025E. Source: Prospectus 2021.

Milk consumption per capita in Indonesia lagging behind most other Southeast Asian countries, including Malaysia, Thailand, and Vietnam.

Rising free incomes trigger shifts in consumption trends and behavior. An increase in income per capita allows more consumers to buy premium products.

MOAT

MOAT — COLD STORAGE CHAIN:According to Euromonitor, the need for cold chain infrastructure capabilities for distribution and warehousingpresents its own obstaclesfor new competitors in the Dairy and Processed Meat Product categories.

• Storage and distribution of Dairy Products and COLD & Frozen Processed Meat are not very developed in Indonesia.
• The construction of a cold chain distribution network requires capital and a significant amount of time

The Company believes that the Company’s cold chain infrastructure network contributes to its profitability and creates barriers to entry for potential competitorsbecause of the difficulty of replicating these operations at scale without waiting times, capital expenditures, and the risk of significant operating losses during the investment phase.

MOAT — PREMIUM PRICING / PRICING POWER:

CMRY Income Segment. Source: Prospectus 2021.

Premium pricing allows for a margin limit that can reduce the impact of volatility in raw material costs.

In addition, along with the increasing demand for high-margin premium products, the Company gains profit from the significant operating benefits derived from economies of scale, which the Company believes will drive the growing profitability of the Company’s net profit. As a result, the Company’s profitability has increased from time to time.

IPO Allocation

IPO Allocation. Source: Prospectus 2021.

• Capital (33%):CAPEX -> addition of capacity to production facilities in the form of PPE. Production line for dairy products, in the form of land/building acquisition, factory expansion, and equipment purchase. Location at Sentul & Pasuruan. Q3 2022 starts.
• Subsidiaries MP (25%):CAPEX -> 
• 80% of MP CAPEX: Addition of a production line for food products consumers, in the form of equipment purchases. Location at Semarang & Jawa Barat. Q3-Q4 2022 starts.
• 20% of MP CAPEX: to working capital, namely financing daily operational needs, among others but not limited to the payment of employee salaries, trade payables, financing of operational activities, and others.
• Subsidiaries MN (20%):CAPEX -> 
• 75% of MN CAPEX: planned expansion of the distribution center (FIXED ASSETS). Location in West Java. Still in the negotiation phase
• 25% of MN CAPEX:used for working capital, namely financing daily operational needs, among others but not limited to the payment of employee salaries, trade payables, financing of operational activities, and others.
• Distribution (15%):used for capital expenditures related to distribution channel expansion in the form of adding about 68,000 chillers in stores and retails, and supporting facilities related to the increase in the number of Miss Cimory which includes training and development facilities.
• Operational (7%): will be used by the Company for working capital, namely financing daily operational needs.

Risk

• Foreign Exchange: Some raw materials, such as aseptic packaging materials and powder milk, are still imported. Foreign exchange risks are present.
• Marketing: I’m not sure how long this online marketing strategy will continue to work like this, but I’m afraid that revenue growth in 2020–2021 will be based on a temporary hype. Which can lead to overcapacity and inventory accumulation as production utilization increases.
• New Competitors: Although it is difficult for new players, it is not impossible for competitors to take the CMRY portion.
• Product Longevity: Yogurt and Fresh Milk have a relatively low shelf life, 7–21 days for yogurt, and 40–45 days for fresh milk in the refrigerator.
• IPO & Expansion: With current utilization still below optimal levels, I believe it is not prudent to construct a new factory. Although the prospectus claims that current supply cannot meet current demand, the data contradicts this claim.

Upside

• AGGRESSIVE MARKETING & HIGH ON DEMAND PRODUCT— Thanks to effective online marketing, CMRY’s product is in high demand among the 18–35 age group. The number of hours people spend on TikTok and other social media platforms corresponds to the online marketing on these platforms.
• MOAT— New competitors face a high barrier to entry into this cold chain distribution storage because it requires a significant amount of capital and time to set up. As a result, CMRY maintains its position as the industry leader in yogurt. Premium pricing allows for a margin limit, which can help to mitigate the impact of raw material price volatility.
• FAST GROWING INDUSTRY & OPPORTUNITY— Yogurt, a fast-growing industry with a 33.3% CAGR, and rising household income cause changes in consumption patterns and behavior. As a result, more people can afford to buy high-end goods.
• EFFECTIVE COST STRUCTURE— Management has a good handle on cost structure, focusing on selling and marketing rather than G&A costs.

Overall, I believe CMRY has a great business with a high barrier to entry for new competitors, as well as high demand for their product, which will make CMRY stay at the top of the yogurt market share leaderboard. Combined with effective marketing and a strong management team in charge of operational costs, their growth will be significantly accelerated.

There were some dubious actions taken with IPO’s fund, which was used to build new facilities when utilization wasn’t near its optimal level. They could use it to produce more products and increase sales, or they could divide it among happy investors as a dividend.

Thanks for reading. See you in the next post.

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