Japfa Ltd - 4Q missed on margins, but still a great FY16
- 4Q16 core net profit (-23% yoy) missed our estimates on weaker margins. FY16 core net profit formed 90% of our full-year forecast.
- Key culprits for the margin miss include 1) lower swine ASPs in Vietnam, and 2) weaker raw milk prices in China.
- The positive is Japfa is doing well operationally (increased volumes and yields). A more favourable selling price environment will immediately translate to profitability.
- We cut our FY17-18F EPS and lower our TP, but our thesis remains intact. Maintain Add.
4Q was a miss, but FY16 was still a record year
- 4Q16 core earnings were below expectations. By segment, the miss mostly came from
- animal protein (AP Other), and
- Sales were decent but 4Q16 EBIT margins for AP Other/dairy were 3%/15% vs. our FY forecasts of 10%/20%. The group’s Indo segment did relatively better, with FY16 EBIT of US$217m (+71% yoy) broadly in line with our US$224m estimate.
- Accordingly, FY16 core net profit was below at 90% of our forecast. Nonetheless, FY16 was still a record net profit year (core earnings +57% yoy).
AP Other lagged our forecasts on weaker swine ASP in Vietnam
- The misstep in the group’s AP Other segment was primarily due to declining swine prices in Vietnam in 4Q, as Chinese demand decreased due to a tightening of swine imports into China.
- In India, demand was also weaker due to the demonetisation of the rupee in Nov. Hence, there was a drag on AP Other’s 4Q EBIT margin (3.0% vs. 3Q16 7.9%). That said, swine feed/fattening volumes were both up 18%/11% yoy in 4Q16.
- Myanmar also performed well; the company opened its second feedmill in 4Q16.
Dairy segment still hampered by weak raw milk prices
- In the dairy segment, the story remains unchanged with the group continuing to make good operational progress but profitability still hindered by weak raw milk selling prices (average ASPs down c.9% in 2016). 4Q’s dairy operating profit therefore declined 8% yoy even as revenues grew 18%, driven by better volumes (+34%).
- Operationally, Japfa’s milk yields in China have continued to improve (FY16: 37.0kg/head/day; FY15: 36.1kg/head/day).
Indonesia doing well
- Improved day old chick (DOC) and broiler selling prices helped to drastically improve margins and were the key drivers for the group’s improved showing in Indonesia. Note that Comfeed’s 4Q16 EBIT margin (7.0% vs. 4Q15’s 11.5%) looked weaker but this was due to a one-off accounting reclassification following the sale of Riveren and Inverway cattle station properties/herd in Australia; otherwise core margins remain strong.
- FY16 EBIT grew a healthy 71% yoy, with margins at 10.9% (FY15: 7%).
Maintain Add; thesis intact
- Despite the earnings miss, we are still positive on the stock given the operational improvements (higher volumes and yields) and retain the view that a more favourable selling price environment will immediately translate to improved profitability.
- We cut our FY17-18F EPS forecasts for lower margins. Accordingly, our SOP-based TP falls to S$1.41.
- Valuations remain compelling with Japfa trading at only 7.4x CY17 P/E, below peers’ 11.4x.
- Downside risks include further weakness in the selling price environment.