Financial Risks from Upstream Investments

February 7, 2017
PT Indofood Sukses Makmur Tbk. (Indofood SM), listed on the Indonesia Stock Exchange, is the country’s largest food company and the market leader in instant noodles, flour, cooking oils, margarine and fats. Its largest shareholder is First Pacific Co. Ltd., a Hong Kong-listed conglomerate with interests in food, telecom, construction, and natural resources. The Indonesian Salim family controls First Pacific. Both Indofood SM and First Pacific face financial risks from their upstream investments. These material risks include contested land and labor risks associated with their supply chains and reputation risks from their investments in their Singapore-listed oil palm plantation subsidiary Indofood Agri Resources.

Key Findings

• Indofood Sukses Makmur: Indofood Agri’s ESG risks could negatively impact the share price of its parent company. A stock price decline of 16 percent could materialize if banks and equity investors with ESG policies avoid Indofood Sukses Makmur because of concerns about deforestation and labor issues at its 74.5 percent controlled subsidiary Indofood Agri.
• First Pacific: Indofood Agri’s ESG risks could also negatively impact First Pacific’s share price. The Hong Kong-listed conglomerate First Pacific has a controlling 50.1 percent stake in Indofood Sukses Makmur and derives 38 percent of its revenues from this investment. Because of these strong links, banks and equity investors could avoid this ultimate parent company as well.

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