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

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.


1Q16 earnings ahead of expectations. 

  • 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%.

Driven by growth outside Indonesia. 

  • 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.

Growth drivers intact. 

  • 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.

Valuation:

  • 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.

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 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


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