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.
- 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).
- 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.