Japfa Limited - DBS Research 2017-02-13: Benefitting from diversified model

Japfa Limited - DBS Vickers 2017-02-13: Benefitting from diversified model JAPFA LTD. UD2.SI

Japfa Limited - Benefitting from diversified model

  • FY16F/17F earnings revised by +2%/-9%.
  • 4Q16 earnings to sequentially moderate 24% on seasonally lower DOC breeding, feed margins.
  • Reduced JPFA's contribution to flatten EBITDA growth, driven by rising contributions from.
  • Dairy/Animal Protein outside Indonesia BUY rating reiterated.



Attractive valuation. 

  • Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia. 
  • It currently trades at a significant discount to its sum-of-parts valuation despite delivering consistent earnings growth from Indonesia, China, Vietnam, Myanmar and India, where per capita demand for dairy, animal protein and branded consumer food is rising.
  • JAP’s FY16F-18F EBITDA CAGR of 10% justifies implied 6.3x forward EV/EBITDA multiple.


FY16F/17F earnings adjusted by +2%/-9%. 

  • On expectations of stable prices in Indonesia this year, we trimmed day-old-chick (DOC) and live broiler ASP; adjusted local corn costs higher, and imputed slightly weaker Rupiah vis-à-vis our previous forecasts.
  • We expect Japfa Comfeed's (JPFA) FY17F EBITDA contribution to moderate, as feed margins normalise. 
  • We also reduced Diary's FY17F EBITDA slightly on lower expected volumes; as we believe our previous forecasts were too aggressive. 
  • Insignificant changes were applied to FY17F EBITDA contributions from Animal Protein outside Indonesia and Consumer Products.


BUY rating reiterated for 22% upside. 

  • JAP’s diversified business model makes its EBITDA growth delivery more resilient than JPFA. 
  • Following a 55% EBITDA growth in FY16F, JAP’s FY17F EBITDA should expand 1%. This will be driven by rising contribution in Animal Protein outside Indonesia, Dairy and Consumer Food segments – offset by lower contribution from JPFA (in the absence of cheaper feed wheat feedstock and gains from sale of Australian cattle ranch).


Valuation

  • Changes to our forecasts trimmed the counter’s EV by 4% but also lowered net debt by 17% – resulting in a 2% increase in equity value to US$0.87/share. 
  • Our SOP-based TP (pegged to FY17F EV/EBITDA) is likewise raised to S$1.26 after imputing stronger US Dollar exchange rate.


Key Risks to Our View

  • JAP’s share price is driven by DOC, broiler and swine prices as well as China raw milk price movements and the USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost JAP’s share price higher than our fair value, and vice versa.




Ben SANTOSO DBS Vickers | http://www.dbsvickers.com/ 2017-02-13
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.26 Up 1.180



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