Japfa Ltd - DBS Research 2017-04-21: Adjusting Our Valuation

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JAPFA LTD. UD2.SI

Japfa Ltd - Adjusting our valuation

• FY17F/18F earnings cut 22%/15% on lower expected contribution from subsidiary Japfa Comfeed.
• Dairy contribution is trimmed on lower expected raw milk price in China.
• Recent sell-down is excessive; DOC/broiler prices have recovered.
• BUY rating maintained.

Oversold. 

• Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia’s fast-growing regions. 
• In this report, we adjusted FY17F/18F earnings to impute lower expected contribution from subsidiary Japfa Comfeed Indonesia (JPFA) due to weaker-than-expected 1Q17 day-old-chick (DOC) and live broiler prices. 
• Our BUY call is maintained, as we believe the recent sell-down had pushed the counter’s price at a significant discount to its revised sum-of-parts valuation. 

FY17F/18F earnings trimmed by 22%/15%. 

• In this report, we adjusted our forecasts to account for lower expected contribution from 51%-owned JPFA (mainly from breeding and commercial farm segments – while feed contribution was raised slightly). 
• Additionally, we trimmed raw milk prices in China slightly and assume negative swine breeding gross margin in Vietnam (swine feed remains profitable). 
• Changes to our forecasts caused lower margins across the board this year; although these were partly offset by higher DOC and feed volumes in Indonesia vis-à-vis previous forecasts.

Expect more interventions post Lebaran. 

• Since initial government interventions were announced end of March 2017 to address the oversupply, both DOC and live broiler prices have recovered (according to Arboge.com) in the worst affected areas; while in others, prices have increased further (early part of Lebaran peak season). 
• We expect the government to take further measures, including parent stock (PS) culling, to address seasonally lower demand after Lebaran.

Valuation

• Changes to our forecasts trimmed our SOP-based TP (pegged to FY17F EV/EBITDA) to S$1.00 – from S$1.25 previously.
• Further upside is possible if government undertakes timely measures to tackle the oversupply.

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/ 2017-04-21

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.00 Down 1.250