Japfa Limited - DBS Research 2017-02-13: Benefitting from diversified model

JAPFA LTD. UD2.SI

Japfa Limited - Benefitting from diversified model

FY16F/17F earnings revised by +2%/-9%.
4Q16 earnings to sequentially moderate 24% on seasonally lower DOC breeding, feed margins.
Reduced JPFA's contribution to flatten EBITDA growth, driven by rising contributions from.

Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia.
It currently trades at a significant discount to its sum-of-parts valuation despite delivering consistent earnings growth from Indonesia, China, Vietnam, Myanmar and India, where per capita demand for dairy, animal protein and branded consumer food is rising.
JAP’s FY16F-18F EBITDA CAGR of 10% justifies implied 6.3x forward EV/EBITDA multiple.

On expectations of stable prices in Indonesia this year, we trimmed day-old-chick (DOC) and live broiler ASP; adjusted local corn costs higher, and imputed slightly weaker Rupiah vis-à-vis our previous forecasts.
We expect Japfa Comfeed's (JPFA) FY17F EBITDA contribution to moderate, as feed margins normalise.
We also reduced Diary's FY17F EBITDA slightly on lower expected volumes; as we believe our previous forecasts were too aggressive.
Insignificant changes were applied to FY17F EBITDA contributions from Animal Protein outside Indonesia and Consumer Products.

JAP’s diversified business model makes its EBITDA growth delivery more resilient than JPFA.
Following a 55% EBITDA growth in FY16F, JAP’s FY17F EBITDA should expand 1%. This will be driven by rising contribution in Animal Protein outside Indonesia, Dairy and Consumer Food segments – offset by lower contribution from JPFA (in the absence of cheaper feed wheat feedstock and gains from sale of Australian cattle ranch).

Changes to our forecasts trimmed the counter’s EV by 4% but also lowered net debt by 17% – resulting in a 2% increase in equity value to US$0.87/share.
Our SOP-based TP (pegged to FY17F EV/EBITDA) is likewise raised to S$1.26 after imputing stronger US Dollar exchange rate.

JAP’s share price is driven by DOC, broiler and swine prices as well as China raw milk price movements and 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/ 2017-02-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.26 Up 1.180