Japfa - DBS Research 2016-09-21: Strenghtening the consumer food business

Japfa - DBS Vickers 2016-09-21: Strenghtening the consumer food business JAPFA LTD. UD2.SI

Japfa - Strenghtening the consumer food business

  • Establishing a JV with PT Cargill Food Investment Indonesia and Cargill Meats (Thailand) Limited.
  • Initial capital subscription of US$2.4m for 40% stake.
  • JV to manufacture cooked poultry products for quick service restaurants, HORECA and convenience stores in Indonesia Manufacturing to start 1Q17.
  • No near-term impact, but long-term potential is significant. BUY rating reiterated.

What’s New 

Establishing new Consumer Food JV with Cargill 

  • Japfa Limited (JAP) wholly-owned subsidiary, PT So Good Food (SGF) overnight announced that it had on 20 September 2016 entered into a Joint Venture Agreement with PT Cargill Food Investment Indonesia and Cargill Meats (Thailand) Limited (both herein referred to as Cargill) to establish PT Cahaya Gunung Foods (CGF).
  • CGF will manufacture unbranded cooked poultry products for supply to quick service restaurants in Indonesia (i.e. fast food chains); as well as hotels, restaurants and catering/food service (HORECA) and convenience stores (CVS). According to Japfa’s press release, CGF will also have the capability to export products to the region.
  • CGF will lease SGF’s existing factory in Boyolali, Central Java and toll-manufacture certain SGF products as well as manufacture new products developed by CGF for SGF (branded). It is unclear whether the new JV will eventually produce ready-to-eat meals for SGF.

Japfa will own 40% - no issue in funding 

  • The initial capital subscription for CGF is US$6.0m – of which SGF will contribute US$2.4m for a 40% stake, while Cargill will subscribe the remaining 60%.
  • According to the announcement, SGF will fund its investment through internal resources and/or bank borrowings. Based on our forecasts, the group has more than enough cash flow to fund the investment.

No immediate impact; but significant long-term potential 

Completion of the initial subscription is expected within the next six months. 

  • We view the arrangement to lease SGF’s existing factory as strategic; enabling the new JV to commence operations and production expediently while not impeding on SGF's operations. We understand SGF has factories elsewhere to which it can shift manufacturing of certain existing products.
  • The JV’s establishment also signals Japfa’s expansion in both product development and customer base, notably wholesale businesses. Globally, we understand Cargill is one of the largest suppliers to fast food chains, and has the technical know-how in product development. The JV also serves as Cargill’s Meats (Thailand) Limited’s expansion into Indonesia.
  • We believe the JV’s establishment will also provide support for Japfa’s Consumer Food segment. Despite having the second largest market share in Indonesia, the segment has lagged behind its Animal Protein and Dairy segment growths.

We are reiterating our BUY call. 

  • We prefer Japfa Limited over Japfa Comfeed, as geographic/product diversification in Dairy and Consumer Food offers Japfa Limited a more balanced risk/return profile.
  • TP S$0.97.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-09-21
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.970 Same 0.970