Japfa Ltd - DBS Research 2016-08-15: Right segment, right time

Japfa Ltd - DBS Vickers 2016-08-15: Right segment, right time JAPFA LTD. UD2.SI

Japfa Ltd - Right segment, right time

  • 2Q earnings slightly ahead of expectations.
  • 2Q16 earnings driven by jump in JPFA EBITDA and continued strong growths in Dairy/Animal Protein outside Indonesia. 
  • FY16F earnings adjusted 7% higher; TP revised to S$0.97 on higher cash balance. 
  • Upgrade to BUY for 28% upside potential. 

Delivering growth. 

  • Japfa Ltd (JAP)’s FY15-18F EBITDA CAGR of 15% justifies our implied 6.6x forward EV/EBITDA multiple. 
  • We believe the stock still 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 earnings raised by 7%. 

  • 2Q16 earnings came in at US$44.6m (+15% y-o-y). Excluding the impact of changes in fair value of biological assets and translation FX gains (losses), 2Q16 core earnings came in at US$48.2m (+238% y-o-y) – slightly ahead of our expectations. 
  • Adjusting for the strong results, we revised our assumptions for Indonesian Feed/dayold-chick (DOC)/ broiler ASP higher; as well as Feed raw material costs lower. 
  • Accounting for its 51% stake in JPFA, we raised FY16F earnings by +7%. Likewise, FY16F EBITDA was lifted by 4%.

Upgrade to BUY. 

  • Based on our revised forecasts, JAP’s EBITDA is due to expand by 14% to US$388.5m next year (from US$339.7m this year) – driven by continued strong growth in Animal Protein outside Indonesia and Dairy segments. Hence, we believe recent price correction is unjustified. 
  • We expect JAP’s net gearing ratio to drop from 63% by end of this year to 48% by end of FY18F. 
  • ROE is also expected to recover from a low of 9.6% last year to 15% this year and next.


  • Our SOP-based TP (pegged to forward EV/EBITDA) is adjusted to S$0.97 – to account for higher cash balance following FY16F earnings revision. 
  • While JPFA remains the largest contributor, the group’s Dairy and Animal Protein segments outside Indonesia continue to deliver respectable double-digit growth annually.

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/ 2016-08-15
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 0.97 Up 0.960