Deep-dive 2021-19: Ultrajaya Milk
Ultrajaya Milk (ULTJ IJ) is the leading dairy company in Indonesia. Its most popular product “Ultra Milk” has a market share of roughly 40% and dominates the mass market.
The company focuses on “UHT milk”. Such milk has been treated with ultra-high temperatures and stored in aseptic packaging, giving it a shelf life of 6-9 months at normal room temperatures. This makes UHT milk highly convenient. Especially in Indonesia given that the climate is tropical and the cold chain infrastructure is undeveloped.
Indonesia’s per capita consumption of milk is only 15 litres per year. That number can be compared with neighbouring Malaysia’s 60 litres. While most people in Asia consume dairy on a regular basis, that is not yet the case in Indonesia. I believe that the gap in milk consumption between Indonesia and its neighbouring countries will narrow over time.
Ultrajaya is run by founder Sabana Prawirawidjaja and his family. Under Sabana’s leadership, the company has grown roughly 10x over the past 15 years. I’m impressed by the company’s honest style of communication. They are tackling difficulties heads-on and readily admit any weakness.
If you want to fault them for anything, it would be for being too conservative. Ultrajaya issued medium-term notes at 7.5-8.5% interest rates at the height of the pandemic, despite plenty of cash on the balance sheet. They justified the action by saying that the uncertainty brought about by the pandemic necessitated additional caution.
On the plus side, Ultrajaya also repurchased 10% of its shares during the crisis. Founder Sabana Prawirawidjaja has also been buying shares for his personal account over the past few months.
The risks are probably manageable. Competition from the likes of Greenfields is heating up but Ultrajaya remains dominant. Import prices for raw milk will fluctuate due to a volatile Rupiah. Costs tend to be passed on to consumers within a few years. One might also question the no-name auditor and minority shareholdings in certain distributors. But the corporate structure is by no means unusual for a family-run business in an emerging market.
Assuming 10% initial top-line growth in line with guidance, some margin pressure due to the planned construction of new production and distribution facilities and a 20x P/E on 2024e earnings, the upside to intrinsic value in that scenario would be +72%.
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