BISI: what we can learn from Russia

After the EU and US imposed sanctions on some Russian businesses following the country’s invasion of Ukraine and annexation of Crimea in 2014, Moscow hit back with sweeping bans on western food imports.

Overnight, about 60% of the country’s total meat and fish imports were banned, and 50% of dairy, vegetable and fruit imports – creating a huge opportunity for domestic producers. Total food imports from the EU fell 40% between 2013 – 2016.

However, instead of collapsing, Russia’s economy is now driven by the revival of its agricultural sector. Around Russia, farms, fields, greenhouses and fertilizer factories are thriving as consumers turn to domestically-produced food, helped by the worst relations between Moscow and the west for a generation.

Russian Aquaculture produced 664% more fish in the 1H17, year-on-year, and recently opened a new 1,500 tonne fish farm, as part of plans to double its fish stocks over the next year. Meanwhile, sales at Rusagro, the country’s largest agriculture company, rose 16% in 2016 compared with the year before, including a 49% increase in sales of crops such as wheat and corn. Wheat production at Steppe, a company owned by conglomerate Sistema, grew 80% last year.

As a result, shares in Rusagro, PhosAgro and meat producer Cherkizovo have more than doubled since 2014. Russian Aquaculture’s have quadrupled.

What lessons can we learn from this incident in Russia?

Well, if you notice, there are similarities in the agribusiness sector situation in Russia and Indonesia at this time. Especially in the corn business in Indonesia. Perhaps the impact will not be exactly the same, but the degree of similarities seems high.

The Indonesian government since the beginning of 2017 has banned the import of maize and instead launched a national movement to grow corn. It aims to reduce imports, empower local farmers and achieve food self-sufficiency.

As a result, already predictable, the current market price of corn in Indonesia reaches IDR 4,500/kg, well above the imported corn price of only IDR 3,500/kg. This certainly makes local farmers more excited to grow corn.

The impact is very clear: it is likely that corn farmers and corn seed sellers will benefit.
That's why I started to glance at a company called PT Bisi International Tbk (BISI).

BISI has been established since 1983 by the Jiaravanon family (CPIN group).

BISI and its subsidiaries manage their business across four major segments: hybrid corn seeds, vegetable & fruit seeds, hybrid paddy seeds, and pesticides & fertilizer. Producing high quality hybrid seeds has been the company’s core business over the years with hybrid corn seed as its main focus. The revenue from the sale of seeds made up 62% of the company’s revenue in 2016, with corn seed as the highest individual contributor at 44%.

BISI has been partnering with Monsanto to import Monsanto’s grandparent seed to Indonesia. The imported seed provide BISI with the highest quality breeder corn seed with highest yield traits.

For seed business, seed production process begins with imported grandfather seeds, which will then be mated with local grandfather seeds to obtain the desired seed quality. The process undertaken in the R&D department produces what is called a foundation seed. The foundation seed is then propagated through a partnership program with local farmers, whereas the company will provide foundation seeds to the farmer for planting with the agreement that the contract farmers must sell all the harvested crops to the company at market prices. The harvests received from these partner farmers are called commercial feeds, which will then be selected, dried and packed, to be sold as seeds to farmers.

The company currently has 60,000 farmer partners, but has only 70,000 tons of capacity for the manufacturing (selecting, drying and packaging) process. The current utilization ratio is 70%.

BISI continuously produces new hybrid seed varieties and introduce up to three new varieties each year to maintain its quality and market share.

Based on data from Ministry of Agriculture (MoA), BISI’s seeds are proven to have higher yield and more resistant to pests and diseases.

For pesticide & fertilizer business, the company imports 80% of raw material needs, which will then be combined with 20% of local materials. The company has pesticide production capability of 15,000 tons, with utility ratio of 80%.

BISI’ sales trend over the last 10 years tends to be stable and slightly up. The year 2008 was a good exceptional year, at which time BISI received a huge windfall from purchasing seeds by the government, which did not happen again in the following year. For 2017, BISI is targeting a 30% y-y sales growth or equivalent to IDR 2.4T.

The pattern of  net income changes tend to follow changes in sales, with the exception in 2011 and 2013. The decrease in net profit in 2011 was due to an increase in operating expenses, while in 2013 was due to higher COGS and also FX loss.

Gross margin and net profit margin fluctuated slightly over the past 10 years, with an average margin of 43% and 16% respectively.

Costs that must be considered is COGS, which is specifically the cost of raw material used and factory overhead. Both account for 36.31% and 13.94% of 2016 total sales, respectively. Raw material used here is the purchase of commercial feeds from partner farmers, whose prices depend on market prices.

For 2017, BISI is targeting +42% y-y net profit growth, or equivalent of IDR 480bio.

I see BISI’s incomes target is quite reasonable considering there is still room at installed capacity.

The company is conservative enough to finance its growth, which appears through the low use of debt levels in the balance sheet. In fact, in the latest quarter (1Q17), the company is in a net cash position (cash of IDR 508 bio vs total liabilities of IDR 334 bio).

Recently the government through Ministry of Agriculture (MoA) has set a target to disburse up to 55k tons of corn seeds in 2017. As the industry leader, BISI should be able to enjoy economies of scale as it aims to continue supply 60% of the government’s free corn seeds needs (program Bantuan Benih). Another segment, namely pesticides & fertilizer, sales will tend to follow the increase in seed sales.

Admittedly, fundamentally BISI is not a superior company that has a “wide moat”. The profit margins trend are slightly down lately. Indeed, in the last 10 years, the company has only twice experienced a decline in annual sales, but there is 4 times decline in net income in the last 10 years. 

On the other side, I found the stock price of BISI is not expensive. Below is a comparison of BISI valuations with similar companies:

Company	P/E17	EV/EBIT17	PBV16	ROE16
BISI IJ	11.95	8.21	2.31	17.26
MON US	24.23	17.84	11.38	39.68
SYNN SW	25.09	5.02	19.72	14.41

Currently there are 4 local brokers who follow this stock, with an average price target of IDR 2,300/share.

Because BISI’ earning tends to be volatile, I personally prefer to set its target share price based on PBV, in relation with its ROE.

In the past 5 years, BISI’ stable ROE tends to increase slightly. Meanwhile, in the same period, BISI was traded on the range of 2.3x BV. Using the same multiply on BISI’ equity 2017, we will get a target share price of IDR 1,625/share.

But since BISI’ ROE is in up trend, let's round the number to 2.5x. By multiplying its 2017 equity with 2.5x, we will get the target price of IDR 1,750, which is still not very far from current target price (+19% upside potential).

I believe this price target is fair and conservative. With a solid financial position, supported by government’ program, and valuation that is not too expensive, I think BISI deserves further attention. The kicking of BISI shares from MSCI small cap a few months ago is also a good moment to collect its shares at low prices.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.