Japfa Ltd - CIMB Research 2017-01-23: Capitalising on Asia’s growing consumption

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JAPFA LTD. UD2.SI

Japfa Ltd - Capitalising on Asia’s growing consumption

• We initiate coverage on Japfa with an Add rating and SOP-based TP of S$1.53 (implied 11.6x CY17F P/E), representing 66% upside potential over current price.
• Japfa is among the top two industrial agri-food companies in most of its markets and its profitability has improved following a recovery in selling prices over the past year.
• On a macro level, we like Japfa as a long-term play on emerging markets’ GDP growth and rising middle class population.
• We forecast 27% EPS CAGR over FY15-18F, driven by its 
  1. stable feed business, 
  2. now profitable breeding and farming segments, and 
  3. strong dairy operations.
• Upside earnings surprise could come from the dairy segment.

Proxy for a rising middle-class in Asia’s most populous countries 

• Japfa is an industrial agri-food company involved in the entire animal protein value chain with an exposure to emerging Asia (Indonesia, Vietnam, Myanmar, India and China).
• The company is in a unique position as it operates in markets where meat consumption and/or incomes are still at very low levels and significantly below the global average.
• Hence, we like Japfa as a play that is poised to capitalise on the growing consumption and rising income in Asia’s most populous countries, in our view.

Core feed business provides stable profitability 

• We especially like Japfa’s stable feed business (c.2/3 of group OP), which we think is under-appreciated. Specifically, its feed business provides a base level of profits and is “margin-proof”. Feed OP margins (OPM) have remained within a tight band of 10-12% over FY13-15 even as IDR/US$ swung unfavourably. 
• Going forward, we expect a sustainable feed OPM within the 10-13% range.

Improved DOC and broiler prices are the swing factor 

• Concerns of an industry oversupply and weak day old chick (DOC) and broiler (i.e. live bird) prices, that were previously a drag on the group’s earnings, no longer pose a threat, in our view. 
• Following the government-initiated culling programme late-2015, overall livestock supply has been reduced 10-15%, adding balance to the demand and supply situation. 
• Both the breeding and farming segments have, therefore, returned to profitability and we remain constructive on DOC and broiler prices in FY17F.

Strong dairy operations could spring upside surprise 

• We believe the dark horse of the group could be its dairy segment in China (c.10% of group profit). This segment is doing well operationally: 
  1. Japfa leads the industry in milk yields (c.80% higher than industry mean); 
  2. sales volumes were up 23% in 9M16; and 
  3. expansion plans are on track, which should increase capacity by c.15% by FY18F.
• The only mitigating factor is a weak raw milk price environment, but we see this segment driving earnings growth for the group upon a milk price recovery.

Initiate with Add and TP of S$1.53 

• Japfa is not covered by many brokers (only one other broker covering) and is undervalued, in our view. 
• The stock trades at an undemanding 7x CY17F P/E, below peers (11x) and its historical trading band (9x). 
• We initiate coverage with an Add rating and a SOP-based TP of S$1.53, which implies a 11.6x CY17F P/E.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-01-23

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