The 9 th International Conference

on Sustainable Collaboration in
Business, Technology, Information
and Innovation 2018

Stock Valuation of PT Tiga Pilar Sejahtera Food Tbk After

Divestiture of Rice Business

Aglentia Dwi Fitri & Subiakto Soekarno

School of Business and Management
Institut Teknologi Bandung
Bandung, Indonesia
aglentia.dwi@sbm-itb.ac.id & subiakto@sbm-itb.ac.id

Abstract

In 2017, the stock price of PT Tiga Pilar Sejahtera Food,Tbk (AISA) has been decrease significantly. AISA’s subsidiary had
been sold subsidized government rice with premium label which is not suitable of the quality, it leads the company sued by its
action. The fraud case also affects the AISA’s financial performance therefore AISA can’t pay its debt that will mature in 2018
and 2019. So, AISA takes divestiture strategy in order to pay its debt and also eliminates the investor’s negative perspective.
This research is to identify the divestiture effects in AISA's financial performance, especially in its stock price with two
valuation models, namely modified absolute valuation models used FCFF and relative valuation models used PER. And also, to
identify the influence of external and internal analysis to the AISA’s financial performance. The recommendation for investor is
buy stock since the AISA’ stock being undervalued (both modified absolute valuation and relative valuation) and the external
analysis shows that AISA has good opportunity in the future. On the other hand, from internal analysis the investors should
consider about the company’s implementation of Good Corporate Governance to anticipate the fraud case will happen again.

Keywords : Divestiture, Good Corporate Governance, Rice Business, Financial Analysis, Stock Valuation.

1. Introduction

Indonesia has the highest population in comparison with Southeast Asian countries amounted to 264 million
[ CITATION Bad17 \l 1033 ]. With a high population of Indonesia is a lucrative market for food and beverage
industry, coupled with the characteristics of food and beverage industry products that basic human needs (primary
needs). In 2015-2035, the food and beverage industry is a priority for industrial development established by the
government [CITATION Min16 \l 1033 ]. Furthermore, food and beverage contributed the largest non-oil and gas
industry GDP of other subsectors amounted to 34.33% in 2017[CITATION Kem17 \l 1033 ]. The   food   and
beverage  sector  total  investment   portfolio in  2018 is predicted  reach  IDR  63.25  trillion,  which  rise  by 6.7%
compared to 2017 amounted to IDR 59.17  [CITATION Placeholder1 \l 1033 ]. As the country with the fourth
largest population in the world and high in middle class growth,  Indonesia has become a promising food and
beverage market such as AISA for investment. PT Tiga Pilar Sejahtera Food Tbk (AISA) is one of food and

© 2017 The 8th International Conference on Sustainable Collaboration in Business, Technology, Information and Innovation
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beverage company that listed in IDX.  Since AISA is a public company then the company has to maximize its
shareholder’s value. The corporate action that the company will do in the futures could affect to its entire business
and its shareholders as well.

1.1 Business Issue

AISA is engaged in two business lines, which are TPS Food and TPS Rice. TPS Food is a core business of the
company that produce basic food (ready to cook) and consumer food (ready to eat) [CITATION PTT16 \l 1033 ].
In 2010, AISA entered the rice business in order to expand the market but TPS rice is facing a serious problem in
2017. A subsidiary of PT Tiga Pilar Sejahtera Food Tbk namely PT Indo Beras Unggul (rice trader) produced rice
with a premium label, while in fact the rice sold to consumers was a cheap rice subsidized by the government.
Because of the fraud case, stock price of PT Tiga Pilar Sejahtera Food Tbk (AISA) plunged to 400 points or
24.92% to IDR 1,205 per share in stock trading on July 21 th 2017. The fraud case also affects the company's rice
business revenue. It makes the revenue of rice business declined in 2017, the company only posted the revenue of
rice business amounted to IDR 2,367,138 million. The revenue of rice business cannot cover its COGS and
operating expenses in the rice business which are too high, therefore the company suffered loss in 2017. Because
of financial difficulties in 2017, the company can’t pay its debt that will mature in 2018 and 2019. In order to pay
its debt and also eliminates the investor negative perspective, the company takes the strategic decision to divest its
rice business. The shareholders also agreed to divest the company's rice business at General Shareholders Meeting
(GMS) on November 20th, 2017. AISA's strategic decision to divest the rice business will affect its revenues, where
the rice business has the largest contribution for AISA's total revenue. In 2016, the company's total sales reached
IDR 6.5 trillion with a total sales contribution amounted to 61.28% coming from the rice business.
The objective of this research is to identify the divestiture affect to AISA’s financial performance, especially on
its stock price as well as to the influence of external and internal analysis on company’s financial performance. In
order to give the recommendation for investors whether the AISA’s stock is worth to buy, hold or sell after
divestiture.

2. Method

External and internal factors are needed to know about the current business situation that can affecting the
company itself. External factors are used to analyze macroeconomic conditions in Indonesia using PEST analysis
as well as food and beverage industry using porter’s five force analysis. For internal factors consist of AISA's
financial ratio before divestiture and the implementation of Good Corporate Governance in PT Tiga Pilar Sejahtera
Food Tbk to analysis fundamental of the company in current condition. Risk analysis is needed to determine what
risks that faced by the company and can have an impact on AISA's stock performance. Those analysis will give
recommendation to investors to invest in AISA’s stock

Business Issue Exploration Business Solution

External Analysis Divestiture
General Environment (PESTEL Analysis) Financial Ratios After Divestiture
Industry (5 Porter Analysis) Stock Valuation Output
Conclusion
Internal Analysis Absolute Valuation Recommendation
Financial Ratios Before Divestiture Relative Valuation
Good Corporate Governance (GCG)

Figure 1. Conceptual Framework

2.1 Analysis of Business Situation:

2.1.1 External Analysis & Internal Analysis
From external analysis showed that the company has big opportunity in food and beverage industry. This is due to
 Aglentia Dwi Fitri & Subiakto Soekarno
the improvement of the Indonesian economy that will affect the growth of food and beverage industry. With
various government policies to improve the supply and distribution of food, so it makes the prediction of volatile
food inflation is still under control and it becomes an advantage for the food and beverage players. With the
increase in Indonesian total population accompanied by an increase in the working population which shows an
increase in people's welfare, increase in middle-class and also increase in the Consumer Confidence Index. So, that
will increase the consumption of food and beverage [ CITATION Ban17 \l 1033 ]. With a high Indonesian total
population makes food and beverage industry is attractive for investors, coupled with the political moments, Eid
Mubarak, holiday allowance, thirteen salaries of civil servants and Asian Games which will also increase the
consumption of food and beverages. From Five Force analysis, it shows that the food and beverage industry is a
competitive industry because the bargaining power of buyer and competition among rivalry are high. But, AISA
anticipate it with the wide distribution channel that become the company’s competitive advantage. From internal
analysis, the company is in the financial difficulties in 2017 due to the problem in its subsidiary. This is happened
because the company has not been optimal in implementing Good Corporate Governance. The occurrence of fraud
case in company’ rice business shows the personal interest of the PT Indo Beras Unggul director and can harm the
stakeholders. So, the management not optimal to identify integrity risk which is the fraud risk conducted by the
subsidiary that can reduce the company's reputation and can reduce the company's ability to maintain its survival.
Moreover, the internal audit committees are also not optimal in controlling the risks of the company.

3. Results and Discussion

3. 1 Company’s Financial Ratios After Divestiture

The company’s strategic decision to divest its rice business will have an effect on its company’s performance as
well as its stock price. The company takes strategic decision to divestiture in order to generate healthier financial
performance in the future. Divestiture greatly affect in the company's profitability ratio that will be increased
significantly as well as the liquidity ratios and time interest earned ratio, those ratios even exceeds the industry
average ratios. And because the company can pay its debts and eliminate the debts that burden the company, so the
company’s debt ratio is also decreasing after divestiture. But the company’s activity ratios still lower than average
industry, so in order to generate more revenue in the future, the company need to utilize its assets (land) to become
some factories and the company also need to utilize its inventory, so there is no excess inventory in the warehouse
which can minimize storage cost and minimize the risk of expired product. For the company’s average collection
period that still higher compare with the industry which indicate the company is less efficient in collecting credit
from customers due to poor credit management and collection department. So, the company need to evaluate the
effectiveness of company’s collection and credit policies.

Table 1. Financial Ratios After Divestiture

Liquidity 2017 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F Avg. Industry 2017
Current Ratio 1.16 1.84 1.74 1.66 1.59 1.53 1.50 1.50 1.53 1.59 1.67 1.76
Quick Ratio 0.80 1.40 1.40 1.31 1.24 1.18 1.15 1.16 1.19 1.24 1.32 1.37
Cash Ratio 0.05 0.65 0.65 0.56 0.49 0.43 0.41 0.41 0.44 0.49 0.58 0.39
Activity
Inventory Turnover 3.06 3.48 3.48 3.48 3.48 3.48 3.48 3.48 3.48 3.48 3.48 4.44
Account Receivable Turnover 2.33 2.96 2.96 2.96 2.96 2.96 2.96 2.96 2.96 2.96 2.96 5.38
Total Assets Turnover 0.56 0.69 0.71 0.72 0.73 0.75 0.75 0.75 0.75 0.73 0.72 0.98
Average Collection Period 156.86 123.41 123.41 123.41 123.41 123.41 123.41 123.41 123.41 123.41 123.41 67.65
Debt
Debt Ratio 0.61 0.46 0.48 0.49 0.51 0.52 0.52 0.52 0.52 0.51 0.49 0.46
Debt to Equity Ratio 1.56 0.86 0.92 0.98 1.03 1.08 1.10 1.10 1.07 1.03 0.97 0.90
Time Interest Earned Ratio -1.31 7.99 7.99 7.99 7.99 7.99 7.99 7.99 7.99 7.99 7.99 7.37
Profitabillity
Operating Profit Margin -0.11 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.07
Net Profit Margin -0.17 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.07
Return on Total Assets (ROA) -0.10 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.06 0.06 0.05 0.06
Return on Equity (ROE) -0.25 0.09 0.10 0.11 0.11 0.12 0.12 0.12 0.12 0.11 0.11 0.10
Gross Profit Margin 0.13 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.25
Earning Per Share (EPS) -171.47 97.69 116.02 137.79 163.63 194.33 225.56 255.73 283.05 305.68 321.88 119.55

3. 2 Absolute Valuation Model (Modified Discounted Cash Flow Method)

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The valuation of this research used modified discounted method that reflect the possibility of distress. Although the
divestiture kept the company' cash flow back to positive, but the company will lose 61% of its revenues. If the
company's revenue decrease will make the company has a high risk of distress, so the valuation calculation uses
modified discounted cash flow [ CITATION Asw12 \l 1033 ].

3. 2. 1 Determine Discount Rate

The valuation used Free Cash Flow to the Firm (FCFF), since the company has too high leverage and expect to
change in the following years. In addition, the company will divest its rice business and will affect the company’
future performance, so the valuation has to represent the company as a whole. The discount rate used is Weighted
Average Cost of Capital (WACC) which included the debt and equity portion in the company.

 Calculating the after-tax cost of debt (Kd).

The company has bonds payable, so the default spread on bonds must be included on cost of debt. The default
spread can be estimated using interest coverage ratio or time interest earned ratio and used default spread from
Damodaran spreadsheet. Risk free rate is also included on the cost of debt, to determine the rate of return for the
debtholder or creditor with zero risk. Risk free rate obtained from Indonesia Bond Pricing Agency (updated July
9th, 2018). By summing all of the costs that have to be paid by company, then the pretax cost of debt can be
obtained as well as tax benefit of 25%. So, the calculation for Kd is:

 Calculating the cost of equity (Ke).

The model stated that the cost of equity is risk-free rate plus a risk premium to cover the systematic risk of the
stock securities.

In evaluating the distress company, the beta is the bottom-up beta. Bottom up beta for distress company obtained
from:

Thus, below is obtained WACC after divestiture for PT Tiga Pilar Sejahtera Food (Tbk):

Table 2. WACC Calculation

WACC
Debt Weight 46.31 %
Equity Weight 53. 69 %
After Tax Cost of Debt (Kd) 8.08 %
Cost of Equity (Ke) 18.59 %
WACC 13. 72 %

3. 2. 2 Estimating The Growth

Due to the company's strategic decision to divest its rice business, the projection of income statement and balance
sheet based on the assumption of Coumpound Annual Growth Rate (CAGR) only from food business amounted to
 Aglentia Dwi Fitri & Subiakto Soekarno
18.76 %. The growth assumptions have to use a three-stage growth if the growth of the company is greater than the
economic growth and there are high barriers to entrants to the industry.

3. 2. 3 Equity Value
The Expected Free Cash Flow in each period has to reflects the possibility of distress.

Table 3 Probability of Distress (Damodaran 2012)

Ranking
Cummulative
AAA AA A+ A A- BBB BB B+ B B- CCC CC C+ C C-
Probability of Distress
5 years 0.03% 0.18% 0.19% 0.20% 1.35% 2.50% 9.27% 16.15% 24.04% 31.10% 39.15% 48.22% 59.36% 69.65% 80.00%
10 years 0.03% 0.25% 0.40% 0.56% 2.42% 4.27% 16.89% 24.82% 32.75% 42.12% 51.38% 60.40% 69.41% 77.44% 87.16%

The firm value is estimated first and then converted to value of equity to get the intrinsic value.

The value of equity has to consider about the possibility of distress. First, the author needs to estimate the variable
on equity value that is cumulative probability of distress in the entire analysis period.

After calculating the variables of the equity value, and then those variables are included into distress adjusted value
of equity formula.
equity value of distress company=value of equity ( 1−cummulative probability of distress )+ Distress sale
Intrinsic value obtained by dividing the current outstanding shares to the equity value. The current outstanding
shares of PT Tiga Pilar Sejahtera Food (Tbk) amounted to 3,219,000,000 shares. Table 4 shows the intrinsic value
of PT Tiga Pilar Sejahtera Food (Tbk).

Table 4 Intrinsic Value

Firm Value 3,795,419

Less: Current Outstanding Debt 1,719,047
Equity Value 1,994,796
Current Shares Outstanding 3,219
Intrinsic Value per Share 620
Buying Price as per May 31th, 244
2017

The current stock price amounted to IDR 244 while the target price will increase significantly after the company
divest its rice business, the target price will be IDR 620 with potential upside 154% from its current stock price on
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May 31th, 2018. Based on the result, the recommendation for investors is to buy the stock.

3. 3 Relative Valuation
Data gathered from competitor’ annual report, this calculation using the number of shares outstanding, net income
and the end year stock price for each competitor. By obtaining Price earnings ratio for each competitor, then the
average price earnings ratio can be determined. Furthermore, the target price can be obtained by multiplying
Earning Per share with average price earnings ratio. According to Damodaran (2012), relative valuation model can
use for distress company by added the probability of distress.

Table 5 Price-to-Earnings Ratios

Price-to-Earnings Ratio
Companies 2015 2016 2017 2018F Target Price
AISA 12.04 10.55 - 1.72 778
Average Industry 18.72 19.02 23.41 23.70

From the result, Price Earnings Ratio of AISA less preferable compared with other competitors. This phenomenon
affected by the company’s historical news, the company was indicated fraud in its rice business, because of that the
company net income suffered loss. On the other hand, if the company divest its rice business, there will be better
future for the company. So, it is suggested to buy company’ stock if they do the divestiture.

4. Conclusions

Conclusion of this final project are a) From external analysis showed that the company has big opportunity in food
and beverage industry. From internal analysis, the company is in the financial difficulties in 2017 due to the
problem in its subsidiary. This is happened because the company has not been optimal in implementing Good
Corporate Governance. The occurrence of fraud case in company’ rice business shows the personal interest of the
PT Indo Beras Unggul director and can harm the stakeholders. So, the management should improve the
implementation of GCG to increase investor confidence level towards company. b) The company's strategic
decision to divest its subsidiary in rice business will have an effect on its revenues that will decrease at the
beginning of divestiture year by 61% of its previous total revenue, the revenue in 2018 will be IDR 3,032,545
million. But the food business has a higher margin than the rice business and the revenue projection will be
increased by 18.76%, using CAGR assumption only from the food business. Moreover, the company's financial
ratios will be healthier compared with the previous year. The absolute valuation resulted in intrinsic value of IDR
620 with potential upside 154% than current stock price of PT Tiga Pilar Sejahtera Food (Tbk) on May 31 th, 2017
amounted to IDR 244 that considered undervalue, this is due to the business issue that already discussed before.
For relative valuation, the company’ Price earnings ratio less preferable compared with other competitor due to the
sentiment perspective in AISA’s stocks. The use of absolute valuation is more suitable because it is not influenced
by market sentiment towards AISA's stocks. This research provides the buy recommendation in AISA’s stock for
investors because the company's stock is being undervalued but it also has big opportunity in the future after the
company divest its rice business. On the other hand, investors should consider about the implementation of Good
Corporate Governance within the company to anticipate the fraud case will happen again.

5. References

Bank Indonesia. (2017). Perumbuhan Ekonomi Indonesia . Jakarta: Bank Indonesia.

Badan Pusat Statistik. (2017). Statistical Yearbook of Indonesia 2017 . Jakarta: BPS-Statistics Indonesia.
Damodaran, A. (2012). Investment Valuation (3rd edition ed.). New Jersey: John Wiley & Sons, Inc.
Damodaran, A. (2012). Valuing Equity in Firms in Distress. Retrieved from Damodaran:
http://people.stern.nyu.edu/adamodar/pdfiles/country/distresspres.pdf
Indonesia Investment. (2017, August 17). Indonesia sets realistic investment target for food beverage industry, 1.
 Aglentia Dwi Fitri & Subiakto Soekarno
(Indonesia Investment) Retrieved May 24, 2018, from Indonesia Investment: https://www.indonesia-
investments.com/id/news/news-columns/indonesia-sets-realistic-investment-target-for-food-beverage-
industry/item8686?
Kementerian Perindustrian Republik Indonesia. (2017, December 8). Kontribusi Industri Makanan dan Minuman,
1. (Kemenperin) Retrieved May 24, 2018, from Kemenperin:
http://www.kemenperin.go.id/artikel/17984/Tertinggi,-Kontribusi-Industri-Makanan-dan-Minuman-
Capai-34,17-Persen
Kementrian Perindustrian Republik Indonesia. (2017). Industry Facts and Figures. Jakarta: Ministry of Industry
Republic of Indonesia.
PT Tiga Pilar Sejahtera Food . (2016). Annual Report 2016. Jakarta: PT Tiga Pilar Sejahtera Food .