Japfa Ltd - CIMB Research 2017-05-02: A Painful 1Q17 Led By Weak Selling Prices

JAPFA LTD. UD2.SI

Japfa Ltd - A painful 1Q17 led by weak selling prices

It pained us to go through this set of results. 1Q17 core net profit (-37% yoy) missed expectations, only forming 14%/12% of our/Blomberg consensus full-year forecasts.
The problem areas: weak broiler prices in Indonesia and swine prices in Vietnam.

While we were already expecting a weak showing in Vietnam, the fall into losses came as a rude shock. Outlook in Vietnam remains poor and losses could continue.
Therefore, we cut our EPS and lower our TP to S$0.58. Maintain Reduce.

Japfa had a forgettable quarter. Amidst a weak selling price environment, 1Q17 sales actually held up well (+3% yoy) on the back of increased volumes. However, profitability suffered.
The broiler business in Indonesia and swine business in Vietnam ran into losses as ASPs were below production costs.
1Q17 core net profit was weak at US$12.5m (-37% yoy) and only made up 14% of our FY17F, or an even worse 12% of Bloomberg consensus’ FY17F.

At Comfeed, operating profit (US$19.5m, -30% yoy) went back to crisis levels (2H14- 1H15) and missed our expectations. For reference, quarterly OP was at US$10m-20m during Indo’s last poultry downturn.
While the feed and day-old-chick (DOC) business remained fairly stable, weak broiler prices had clearly negatively impacted Comfeed’s profitability.
We would have cut Comfeed’s estimates, if not for management guiding that the seasonal pick-up from Ramadan in 2Q could drive a recovery in broiler ASPs.

We had already expected a poor showing in the group’s Vietnam market, owing to weak swine prices. However, the fall into losses (-US$5.9m) still came as a rude shock vs. our expectation of a small profit.
The concern now is that swine prices could stay lower for longer, since the current oversupply problem is a result of China tightening its swine imports and there is little visibility on whether China will loosen its policies. We were bearish on this segment before; now even more so.

The only bright spot in this set of results is the group’s China dairy business. 1Q sales was up 19% yoy even as raw milk prices fell 4% yoy.
The group also managed to improve OP margins to 22.1% (1Q16: 21.5%) due to better operational efficiency and enhanced milk yields.
Dairy’s 1Q operating profit (US$18.3m, +22% yoy) was therefore ahead of our expectations. That said, management is guiding for raw milk prices in China to remain sluggish; this could put downward pressure on margins.

It is difficult to envision any quick turnaround in Vietnam, since the weak environment will likely persist, barring changes to China’s import policy.
Further, any natural market supply readjustments will not be felt for the next 6-9 months due to the longer lifecycle of swine. As such, we cut our FY17-19 EPS forecasts as we adjust for weaker expectations in Vietnam, albeit mitigated by a stronger dairy showing.

The stock has retraced 20+% since mid-Apr but we still think there could be more downside. We retain the view that it is too early to turn positive on the stock, with no sign of an industry turnaround yet.
Our SOP-based TP falls to S$0.58.
Upside risks: a recovery in ASPs, or stronger-than-expected Ramadan season.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-02

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.58 Down 0.690