Japfa Ltd - DBS Research 2015-12-15: Normalising growth

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JAPFA LTD UD2.SI 

Japfa Ltd - Normalising growth 

Better 3Q15 EBITDA expected. 

• We believe the steep share 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 at 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 to recover as government-mandated nationwide cull of 6m parent stock takes place (expected in 4Q15). 

Long-term growth potential remains intact. 

• Japfa is 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 its 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 a 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. 

Valuation: 

• Our SOP-based TP is S$0.90. 
• With Rupiah stabilising, we expect reduced FX losses and recovery in purchasing power in Indonesia next year. Our BUY rating for the counter is reiterated on 78% 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/ 2015-12-15

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