Japfa Ltd - DBS Research 2016-07-27: Adjusting to JPFA sell-down

Japfa Ltd - DBS Research 2016-07-27: Adjusting to JPFA sell-down JAPFA LTD UD2.SI 

Japfa Ltd - Adjusting to JPFA sell-down


Delivering growth. 

  • Japfa Limited (JAP)’s FY15-18F EBITDA CAGR of 16% justifies our implied 6.4x forward EV/EBITDA multiple. We believe the stock trades at a significant discount to its Indonesian-listed subsidiary Japfa Comfeed Indonesia (JPFA), despite delivering decent earnings growth from China, India, Vietnam and Myanmar – where per capita demand for dairy, animal protein and branded consumer foods is still rising.


FY16F/17F earnings adjusted down by 6%/18%. 

  • We raised EBITDA contribution from subsidiary JPFA by 22% in FY16F and 18% in FY17F on stronger than expected margins from DOC and commercial farm segments. However given JPFA’s recent placement to KKR Jade Investments and 3.87% sale of its stake, the group’s previous 58.7% share of JPFA earnings is now diluted to 51%. 
  • The higher JPFA contribution is also offset by 35% and 37% cuts in FY16F and FY17F Dairy EBITDA, as we trimmed raw milk ASP in China by 9% and 6%, respectively (vs. our previous forecasts). 
  • We understand demand for raw milk remains weak year-to-date. EBITDA contribution from Animal Protein outside Indonesia has also been trimmed by 33% and 27%, as we expect lower margins than previously assumed, although volumes continues to expand.


Rating cut to HOLD. 

  • Helped by equity injection and improved EBITDA contribution from JPFA, we expect JAP’s net gearing ratio to drop from 64% by end of this year to 49% by end of FY18F. 
  • ROE is also expected to recover from a low of 9.6% last year to 14% this year and 15% next. But given its strong share price performance YTD and 8-14% cuts in EBITDA estimates, we believe there is limited upside from the current level.


Valuation:

  • Our SOP-based TP (pegged to forward EV/EBITDA) is trimmed to S$0.96, employing FY17F as the base year. 
  • JPFA remains the largest contributor, although contribution from the group’s Dairy and Animal Protein segments outside Indonesia continues to rise.


Key Risks to Our View:

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




Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-07-27
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.96 Down 1.10


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