Japfa Ltd - DBS Research 2017-03-03: Growing, despite seasonal weakness

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JAPFA LTD. UD2.SI

Japfa Ltd - Growing, despite seasonal weakness

• 4Q16 core earnings below expectations
• This was dragged by poorer-than-expected Consumer and Animal Protein outside Indonesia.
• FY17F/18F tweaked by 0%/-2%.
• BUY rating reiterated for 39% upside to revised TP.

Attractive valuation. 

• 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 FY16-18F EBITDA CAGR of 12% justifies implied 6.4x forward EV/EBITDA multiple.

FY17F/18F earnings adjusted by 0%/-2%. 

• Core 4Q16 PATMI came in at US$15.6m – below US$37.4m (including FX gain of US$5.5m) expected; due to provision for uncollectible accounts, accrued employee share option plan, poorer-than-expected 4Q16 EBITDA contribution from Animal Protein outside Indonesia and Consumer Food; as well as 4Q16 FX loss of US$14.8m. 
• We adjusted FY17F/18F earnings by 0%/-2% on slightly lower forecast EBITDA and lower borrowing cost.

BUY rating reiterated for 39% upside. 

• JAP’s diversified business model makes its EBITDA growth delivery more resilient than JPFA. 
• Following a 42% EBITDA growth in FY16, JAP’s FY17F EBITDA should expand 6%. This will be driven by rising contribution in Animal Protein outside Indonesia and Dairy segments.

Valuation

• Changes to our forecasts trimmed our SOP-based TP (pegged to FY17F EV/EBITDA) to S$1.25 – from S$1.26 previously – reflecting lower cash balance and slightly lower EBITDA.

Key Risks to Our View

• 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/ 2017-03-03

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.250 Down 1.260