Japfa Ltd - DBS Research 2015-11-03: Catching up

Japfa Ltd - DBS Research 2015-11-03: Catching up JAPFA LTD UD2.SI 

Japfa Ltd - Catching up 

  • 3Q15 core earnings of US$14.1m was above US$7.4-10.1m expected. 
  • Stronger-than-expected Japfa Comfeed contribution on top of sequentially softer contributions from other segments. 
  • FY15F/16F earnings raised by 25%/6%; as we impute better ASP except for China raw milk prices. 
  • BUY call reiterated on 128% upside to revised TP of S$0.90 – as we roll forward base year to FY16F 3Q15 core earnings of US$14.1m was above US$7.4-10.1m. 

Better-than-expected earnings. 

  • Excluding changes in biological asset fair values, Japfa Limited (JAP) booked 3Q15 earnings of 14.1m (+17% y-o-y; -1% q-o-q) – ahead of expectations. 
  • This brought 9M15 core net income to US$30.0m (-26% y-o-y) – representing 84% of our initial FY estimates. 
  • 3Q15 EBITDA (net of elimination) came in at US$89.7m (+52% y-o-y; -44% q-o-q) – also ahead of US$71-76m expected range. 
  • Strong USD caused 3Q15 top line to shrink 11% y-oy (-1% q-o-q); while COGS moderated 16% y-o-y (-4%) on lower realised raw material costs, partly offset by weaker Rupiah. 
  • 3Q15 GPM/OPM thus recovered strongly to 19.9%/9.5% from 17.3%/6.3% in 2Q15 and 15.7%/5.5% in 3Q14. 

Driven by Japfa Comfeed. 

  • Earnings recovery reflects sequential jump in 57.5%-owned Japfa Comfeed (JPFA) 3Q15 core profit contribution of US$19.6m from US$1.3m in 2Q15. This was augmented by sequentially softer core earnings contributions from Animal Protein businesses outside Indonesia (US$6.8m vs. US$9.0m in 2Q15) and Dairy (US$3.3m vs. US$6.3m in 2Q15). The strong results primarily reflect better pricing amidst modest sequential gains in volumes of Animal Feed (+1%), DOC (+9%), broilers (-1%), beef (- 18%), China raw milk (+1%), and Southeast Asia branded milk (+6%), respectively. 
  • The group also posted US$5m gains from US$18m buyback of the US$225m notes due 2018 at 69 cents. 

FY15F/16F earnings raised 25%/6%

  • FY15F/16F earnings raised 25%/6%, after we imputed higher Rupiah exchange rates, higher DOC/broiler ASP, notes buyback, as well as lower raw material price forecasts. 
  • We cut FY15F/16F China raw milk ASP to RMB4.00/RMB4.10 per kg, as we believe there remain near-term challenges outside of contracted volumes – although we understand demand has started to rebound. 

BUY rating reiterated 

  • BUY rating reiterated for 128% upside to our revised TP of S$0.90; as we roll forward our valuation to FY16F base year – although our EV/EBITDA target multiples remain unchanged. 
  • In consequence to the ongoing 6m PS cull (JPFA’s share is 16%), we expect GPM to improve on lower breeding cost and stable ASP. 
  • At over 100% growth, we believe JAP remains undervalued at 6.3x forward PE.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2015-11-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.90 Up 0.46