Japfa Ltd - DBS Research 2015-10-29: Normalising Growth

Japfa Ltd - DBS Research 2015-10-29: Normalising Growth JAPFA LTD UD2.SI 


Better 3Q15 EBITDA expected. 

  • We believe the steep sha Better 3Q15 EBITDA expected re price correction YTD has more than priced-in Day Old Chicks (DOC) oversupply in Indonesia and softer raw milk prices in China. 
  • We expect Japfa’s 3Q15 earnings to show a sequential improvement, given higher feed prices and relatively resilient broiler and DOC prices despite steeper translation FX losses from subsidiary Japfa Comfeed’s US$225m bonds. 
  • We expect 3Q15 EBITDA to come in between US$70.9-76.0m (+20-28% y-o-y) and earnings (ex. fair value changes in biological assets) of US$7.4-10.1m (16-38% lower y-o-y).

Weak purchasing power may linger in the short term. 

  • Continued weakness in the Rupiah would progressively raise Japfa’s feedstock costs, and at the same time lift cost of living for Indonesian consumers (implying weaker purchasing power). 
  • We expect the DOC oversupply situation to balance out and prices recover as government-mandated nationwide cull of 6m parent stock takes place (expected in 4Q15). 

Long term growth potential remains intact. 

  • Japfa is Long term growth potential remains intact. forecast to book EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 15% between 2014 and 2017 – mainly driven by higher dairy volumes. 
  • Japfa intends to double dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. 
  • In the Animal Protein segment, we expect Japfa’s combined regional DOC output to expand less aggressively by 5% CAGR between 2014 and 2017, given DOC overcapacity and weak purchasing power in Indonesia. 
  • Demand will continue to be driven by rising per capita income. 


  • Our SOP-based TP is S$0.46. We expect reduced contribution from Japfa Comfeed given losses in poultry breeding operations and FX losses. 
  • Our BUY rating for the counter is maintained on 15% upside potential. 

Key Risks to Our View: 

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

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2015-10-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.46 Same 0.46