No change at Bogasari in wake of shift of ownership to Indofood

by Teresa Acklin
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   No changes will be made in the operation of Bogasari Flour Mills as a result of the recent change in the company's ownership, Piet Yap, head of Bogasari, observed during an interview at his office in Jakarta.

   Bogasari is newly operating as a division of Indofood Sukses Makmur, Indonesia's leading food company, which acquired the business from PT Indocement Tunggal Prakarsa. Bogasari's new owner, Indofood, has a major position in the manufacture of instant and cup noodles, while the former owner of the milling company, Indocement, is the country's largest cement manufacturer and concrete supplier.

   Both Indofood and Indoce-ment are publicly traded companies controlled by the Salim Group, meaning in effect that the transfer was within sister organizations, explaining Mr. Yap's assurances about “no change” in management.

   According to Merrill Lynch, the purchase price for Bogasari represented 12 times its forecast of 1995 earnings. The milling company's sales for 1995 were projected as equal to U.S.$420 million, while its projected operating profits totaled U.S.$70 million.

   While the price was at a premium to market multiples, Merrill Lynch said bright Bogasari earnings prospects made the price less unattractive than thought when the transaction was first announced. It based that favorable earnings outlook “on the assumption that the flour offtake price by Bulog would increase by 5% in 1996,” following an indicated 8.8% increase in Bulog's flour offtake price last May 1, which was described as the first change since 1990. The new offtake fee is Rp298, which Merrill Lynch said “should have a significant impact on Bogasari's profitability, assuming there is no change in the price of wheat purchased from Bulog.” It added, “If this increase is followed by 5% to 6% average annual increases from 1996 onwards to offset inflation, then the acquisition would look reasonably attractive.”

   According to Merrill Lynch, these changes would raise Bogasari's gross margin, before depreciation, to 28% in 1995 from 24% in the prior year.

   The Merrill Lynch analysis of the mill purchase by Indo-food also cited several benefits for the food company. These included bulk flour delivery to major noodle plants, tax benefits arising from a difference between fiscal and commercial depreciation rates and “the expected strong demand growth for flour in the future.”

   The analysis quoted Indo-food management as saying that around 336,000 tonnes of flour a year would in all likelihood be delivered in bulk to Indofood plants. That would represent 70% of Indofood's current annual flour usage, indicating its aggregate flour use at 480,000 tonnes in wheat equivalent, or about 20% of Bogasari's annual production.

   Indofood itself, prior to the Bogasari acquisition, posted sales in 1994 of U.S.$600 million and net profits of U.S.$100 million. More than 85% of its volume represented instant noodles. The group expects to sell 7 billion packs of noodles in 1995, operating at present 10 plants and 16 distribution centers selling through more than 150,000 retail outlets.