Japfa Ltd - DBS Research 2016-04-29: More catalysts ahead

JAPFA LTD UD2.SI

Japfa Ltd - More catalysts ahead

1Q16 underlying earnings of US$24.4m were ahead of our expectations on an annualised basis.
Driven by higher contributions from Animal Protein outside Indonesia and Dairy segments.
Japfa Comfeed’s contribution shrank q-o-q on moderation in feed margin, commercial farm loss.

Forecasts unchanged, TP rolled over to FY17F base year. Maintain BUY for 57% upside.

Reported 1Q16 earnings came in at US$23.4m (+234% y-o-y; -50% q-o-q).
Excluding gains from changes in fair value of biological assets (net of tax) – but including recurring translation FX gains (losses) – the group posted 1Q16 net earnings of US$24.4m (-28% q-o-q; up from US$1.6m in 1Q15).
1Q16 earnings thus contributed 23% of our full-year target vs. the two-year average of 12%.

EBITDA contribution from Animal Protein outside Indonesia expanded 8% y-o-y to US$11.7m (+36% q-o-q); while Dairy segment EBITDA grew 10% y-o-y to US$18.1m (+3% q-o-q). These were partly offset by 25% y-o-y increase in G&A (+25% q-o-q) on bonus payments.
EBITDA contribution from Japfa Comfeed sequentially eased 33% to US$43.5m (+114% y-o-y) due to moderation in poultry feed margin and losses in commercial farming; as DOC ASP recovery was faster than that of broiler.

Japfa is forecast to book EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 23% between FY15 and FY18F – 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 6% CAGR over the same period, given the curbs on DOC capacity.
Demand will continue to be driven by population growth and rising per capita income.

Our SOP-based TP (pegged to forward EV/EBITDA) rises to S$1.10, as we roll forward to FY17F base year.
Japfa Comfeed will remain the largest contributor, although the group’s Dairy and Animal Protein outside Indonesia segments will increasingly have a more meaningful contribution.
Our BUY rating for the counter is reiterated.

Japfa’s share price is driven by DOC, broiler and China raw milk price movements and to a certain extent, by the 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/ 2016-04-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.10 Up 0.90