How Will SCG Packaging Target for Investment in Indonesia?

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1 NOVEMBER 2017 How Will SCG Packaging Target for Investment in Indonesia? By Hans Larsson, Senior Consultant, Fisher International It was announced on October 3 that SCG Packaging will invest in packaging production in Indonesia when acquisition opportunities present themselves, citing that organic growth would take too long. Nothing was revealed about which businesses might be targeted for acquisition. SCG Packaging already has two production facilities in Indonesia, PT Primacorr Mandiri and PT Indoris Printingdo, and while the company is able to acquire both containerboard production and converters, in this article I will focus on the opportunities presented by the former. SCG, a Thai company, has three business legs: Cement, Chemical and Packaging. Turning its focus towards packaging, SCG Paper rebranded in 2015 by changing its name to SCG Packaging. The strategy is clear: expand the packaging business in ASEAN countries as the packaging segment grows and the cement business is flat. Over the past ten years the company has expanded its investment in containerboard interests from three paper machines in Thailand producing less than 280,000 MT to 14 paper machines producing roughly 2.1 million MT of paper and board (Figure 1).

2 2 Today, SCG has containerboard production and converting facilities in Thailand, the Philippines, and Vietnam as well as two converters in Indonesia (Figure 2). The foreign investment climate in Indonesia has gradually improved. The authorities encourage foreign investments and have made it easier to do so. Containerboard consumption in Indonesia is driven by a growing population and improved economy (Figures 3 and 4). Its growing e-business is also a major driver as the goods produced have to be protected in transport. Purchasing power is increasing among the Indonesians. The annual apparent consumption of containerboard is roughly 9 kg per capita and, with growing GDP, it is likely to increase. Therefore, conditions for containerboard production investment are favorable. Indonesia s containerboard industry is dominated by two large companies,

3 3 Fajar Surya and APP who together have almost 60% of the containerboard capacity (Figure 5). That leaves a number of smaller companies that could be suitable candidates for acquisition. Factors that determine if a company is attractive for acquisition Product Portfolio - It is an advantage if the target asset has a product portfolio with grades fitting the acquiring company s growth strategy which, in this instance, means that an acquisition target should produce packaging grades consistent with the strategic outcome being pursued. For the initial cut, attractive acquisition targets are to be found among those producing only packaging and above a reasonable size (Figure 6). In Indonesia, 75% of the packaging-producing mills have portfolios dedicated exclusively to packaging grades. At the next level, it is necessary to drill down to the grades being produced, fiber and furnish, etc. (See Figure 6 inset as an example of how the drill-down would proceed.)

4 4 Technical Age - Indonesian containerboard mills are relatively old, requiring investment to be modernized for higher efficiency (Figure 7). Here again, a further drill -down into the equipment data can quickly justify or disqualify assets to be considered for investment. Viability - Figure 8 ranks paper machines in Indonesia producing containerboard according to their viability risk as modeled in FisherSolve. The asset s Viability Index is a calculated value based on five different weighted factors: Tons per Inch Trim (production efficiency), Technical Age, Size, Cost and Capital Required to get the machine up to state of the art.

5 The Viability Index is a good measure to judge the long-term survival strength of the machine or asset. (The lower value means lower risk and higher viability.) Identifying suitable assets for acquisition can be initiated using FisherSolve data and analytics to screen for targets that fit the unique strategy of the acquiring company including the right product portfolio, technical age, production efficiency, and last but not least, long term viability. Hans Larsson can be reached at hlarsson@fisheri.com Fisher International, Inc. 50 Water Street Norwalk, CT USA