DBS Group Research 2015-07-30: Japfa Ltd. Oversold. Upgrade to BUY.


  • Ex fair value changes in bio assets, Japfa Limited (Japfa) delivered 2Q15 core earnings of US$14.3m (-36% y-o-y) 
  • The drop y-o-y was driven by losses in its Indonesia DOC breeding segment, FX losses and absence of a one- off gain booked in 2Q14 
  • Forecasts unchanged; as we believe Japfa should still meet our FY earnings estimates 
  • Rating upgraded to BUY; we believe recent sell-off was unjustified 

Sequential recovery; but still down y-o-y. 

  • Stripping out changes in fair value of biological assets, Japfa’s 2Q15 core net profit came in at US$14.3m (-36% y-o-y; >7x q-o-q) – which translates into 1H15 core net income of US$15.9m (i.e. 45% of our FY estimates). 
  • However, 2Q15 and 1H15 core net earnings included US$6.0m and US$19.9m translation FX losses – reflecting the group’s exposure to the US$225m bonds. 
  • Excluding these, Japfa would have achieved 55% of our FY target. 

DOC oversupply in Indonesia dragged earnings. 

  • In the absence of a US$9.6m one-off gain in 2Q14, the group’s 2Q15 earnings were also dragged by (57.5%-owned) Japfa Comfeed’s 2Q15 net loss of Rp50.4bn, as Indonesian DOC breeding operations suffered from persistent oversupply and muted Lebaran season. 
  • Faced with a y-o-y drop in raw milk prices in China, Japfa’s Dairy EBIT had likewise eased 58% y-o-y. 
  • These were partly offset by higher contributions in feed and commercial farms EBIT. 
  • Animal Protein EBIT from operations in Vietnam, Myanmar and India had also expanded q-o-q. 

No change in forecasts. 

  • Ex. PATMI losses from Japfa Comfeed (US$12.9m loss) and Consumer Food division (US$0.7m loss); Japfa’s other businesses (i.e. Animal Protein outside Indonesia, Dairy and others) made US$29.5m PATMI in 1H15. 
  • Note that Japfa Comfeed’s 1H15 net losses included US$20.5m of translation FX losses. Hence, with forecast c.2% further depreciation in Rupiah until year-end, we believe Japfa should meet our FY earnings target. 

Rating raised to BUY for 28% upside. 

  • We believe the recent sell-off is excessive, with market value deeply below book and single-digit forward PE – despite decent contributions from Animal Feed, Animal Protein outside Indonesia and China Dairy.
  • Price Target : S$0.46 (28% upside)


Source: http://www.dbsvickers.com/