Deal focus: Affinity concludes Indonesia herbal medicine journey with 2x return

Tuesday 23rd April 2024

  • Sido Muncul’s founding family bought back Affinity's stake at 105% premium to entry price 
  • Value creation efforts included broadening of revenue base, distribution expansion
  • Renewable energy, farmer education, inclusion initiatives underpinned ESG effort

By Mergermarket

Share buybacks seldom translate into optimal outcomes for private equity investors in Asia. Of the approximately 400 investments for which this has been the exit route in the past 10 years, just one in 15 generated proceeds of more than USD 100m, according to AVCJ Research. Accounts of these deals happening above cost are even rarer, especially when the buyer is a family group.

Yet Affinity Equity Partners recently sold its remaining 17.1% stake in Indonesia-based herbal medicine producer Sido Muncul to the Hidayat family – now in its third generation of ownership – for IDR 3.69trn (USD 227.5m). The price of IDR 719 per share is a nearly 30% premium to the three-month trading average and a 105% premium (post-stock split adjustment) to Affinity’s entry price.

Including dividend payments and a block trade in 2022 worth IDR 1trn, the private equity firm has generated a 2x return on its investment (or 2.3x in rupiah terms).

“It’s one of those rare cases where the majority owner has bought back at a premium to the market. Most of the time, they buy back at cost, and often just for relationship purposes,” said Benny Lim, a partner and head of Southeast Asia at Affinity. “This is recognition of our value creation work in partnership with management and the opportunity they see going forward.”

The investment, in late 2017, saw Affinity pay about USD 180m for 21.1% of Sido Muncul. It was a play on the Indonesia consumer story but also a dive into the unknown. Herbal medicine wasn’t being targeted by private equity; Sido Muncul wasn’t well understood by Indonesia’s public markets. Having listed in 2012, the company was trading at 60% discount to its IPO price by September 2017.

Affinity’s timing was fortuitous. The Hidayat family – which also has interests in hospitality – wanted to support other ventures, so it was receptive to proposals that could facilitate this outcome and bring value to Sido Muncul. Though the target was listed, Affinity approached it much like a partnership with a privately held family-owned business.

“Running a USD 100m revenue business is very different from running a USD 1bn revenue business, and a lot of family owners don’t have the knowhow or sophistication to engage institutional investors,” Lim added. “We wanted to institutionalise it and get the story out there.”

Raising the bar

Even in 2017, Sido Muncul had a compelling story to tell. It was the runaway leader in Indonesia’s herbal medicine space with a more than 70% market share. The nearest rival was on about 10%. Revenue reached IDR 2.57trn in 2017, while net profit surpassed IDR 533bn.

Affinity’s priorities included augmenting the management team, notably adding a CFO and head of business development and agreeing with the family owners on the appointment of David Hidayat – the youngest brother – as CEO. Then it set to work on product development with a view to easing dependency on Tolak Angin, a cold and fever remedy that contributed nearly 90% of revenue.

“Today, it represents less than 60% of revenue because we introduced a range of new products: an energy drink, RTD drinks, and supplements that proved a big hit during COVID,” said Aston Zheng, a vice president at Affinity. “Sido Muncul is a strong and enduring brand in the minds of Indonesian consumers, and we thought about how we could launch products to leverage that brand equity.”

With this came a change in distribution strategy. Sido Muncul is known for selling its products by the sachet through a network of 160,000 outlets nationwide, many of them roadside kiosks. RTD beverages, which are packaged ready for consumption, require a different approach. The company built out its retail channels to include supermarkets, e-commerce, and direct-to-consumer.

At the same time, exports climbed from 1% of sales to 10%. In addition to countries in Southeast Asia such as Malaysia and the Philippines, Sido Muncul’s products have proven a hit in Nigeria, where it now claims to be the third-largest player in the powder-based energy drink category.

By 2023, revenue and net profit were up 39% and 78% at IDR 3.57trn and IDR 948bn. Gross profit margin hit 57%, up from 41.7% in 2017. Meanwhile, average daily trading volume has increased 3.4x on the back of a stock split in 2020 intended to improve liquidity, Sido Muncul joining 15 Indonesia Stock Exchange indices, and the number of analysts covering the stock rising from three to 27.

The ESG angle

Those 15 indices include all four focused on environment, social, and governance (ESG) performance. The largest of the four was established as recently as 2020 and two more were launched in 2021, demonstrating how ESG became increasingly important from a public company perspective over the course of the investment.

For Affinity, it was an early and obvious consideration. Sido Muncul’s supply chains alone – it sources raw materials from 20 cooperatives representing more than 3,000 local farmers – meant that much could be done across environmental preservation, product integrity, and sustainable sourcing. Inclusivity came into it as well, given half of the company’s 4,000-plus employees were female.

“We quickly identified low-hanging fruit in ESG. It was just about environmental protection. For example, we took the herbal dregs biomass from the production process and used it to make renewable energy that today accounts for 50% of Sido Muncul’s energy consumption,” said Zheng.

“We also implemented a farmer education program with respect to cardamon production – teaching farmers how to properly cultivate their crops and make biopesticides and compost.”

The program has led to a sixfold increase in the incomes of participating farmers, while Sido Muncul has created a more robust supply chain that contributes to broader efforts related to topline and bottom-line expansion through pricing power and efficiency gains. The company also invested in infrastructure, such as a tissue culture laboratory that produces hardier and more adaptable seeds.

In terms of inclusivity, training programs were introduced to accelerate the rise of females through the managerial ranks. Women now occupy nearly 40% of senior management positions. Ongoing progress on this and other initiatives – from waste management to workplace safety – is tracked through Sido Muncul’s annual ESG reports, the first of which was published in 2018.

“ESG was part of the value creation, but it became a bigger part over time,” said Queenie Ho, a partner at Affinity. “We feel that it supported the exit story as well. In our discussions with strategic investors and ultimately in public market communication and investor relations, ESG was a key part.”