Japfa Ltd - Adjusting our valuation
- FY17F/18F earnings cut 22%/15% on lower expected contribution from subsidiary Japfa Comfeed.
- Dairy contribution is trimmed on lower expected raw milk price in China.
- Recent sell-down is excessive; DOC/broiler prices have recovered.
- BUY rating maintained.
- Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia’s fast-growing regions.
- In this report, we adjusted FY17F/18F earnings to impute lower expected contribution from subsidiary Japfa Comfeed Indonesia (JPFA) due to weaker-than-expected 1Q17 day-old-chick (DOC) and live broiler prices.
- Our BUY call is maintained, as we believe the recent sell-down had pushed the counter’s price at a significant discount to its revised sum-of-parts valuation.
FY17F/18F earnings trimmed by 22%/15%.
- In this report, we adjusted our forecasts to account for lower expected contribution from 51%-owned JPFA (mainly from breeding and commercial farm segments – while feed contribution was raised slightly).
- Additionally, we trimmed raw milk prices in China slightly and assume negative swine breeding gross margin in Vietnam (swine feed remains profitable).
- Changes to our forecasts caused lower margins across the board this year; although these were partly offset by higher DOC and feed volumes in Indonesia vis-à-vis previous forecasts.
Expect more interventions post Lebaran.
- Since initial government interventions were announced end of March 2017 to address the oversupply, both DOC and live broiler prices have recovered (according to Arboge.com) in the worst affected areas; while in others, prices have increased further (early part of Lebaran peak season).
- We expect the government to take further measures, including parent stock (PS) culling, to address seasonally lower demand after Lebaran.
- Changes to our forecasts trimmed our SOP-based TP (pegged to FY17F EV/EBITDA) to S$1.00 – from S$1.25 previously.
- Further upside is possible if government undertakes timely measures to tackle the oversupply.
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.