Japfa Ltd - CIMB Research 2017-07-28: Suffering From Swine Flu

Japfa Ltd - CIMB Research 2017-07-28: Suffering From Swine Flu JAPFA LTD. UD2.SI

Japfa Ltd - Suffering From Swine Flu

  • Japfa's 2Q17’s results were bad, with a net loss of US$3.4m. Even excluding forex and bio asset FV losses, 2Q’s quarterly core net profit was the group’s lowest since its IPO.
  • The main culprit was Vietnam, where swine prices continued to slide (-29% qoq) with ASPs far below breakeven levels. This segment will likely still be loss-making in 3Q.
  • Indonesia was better qoq due to seasonality (Ramadan), but whether or not ASPs can be sustained post-Ramadan is uncertain.
  • We cut our EPS mostly on the back of a weaker-than-expected Vietnam. Maintain Reduce. 
  • Upside risks include quicker swine price recovery or pick-up in Indonesia demand. 

What went wrong? 

  • 2Q17’s core net profit (US$3.4m, -94% yoy) was below expectations at only 4% of our FY17F forecast. 1H17 formed 18% of our FY17F. 
  • The poor showing was mostly due to the continued slide in swine prices affecting Vietnam. Even the group’s usually stable consumer food segment recorded a bigger-than-expected loss in the quarter. 
  • While Indonesia enjoyed a better quarter sequentially, this was mostly helped by Ramadan. Underlying demand is still otherwise relatively muted. 

Worsening situation in Vietnam 

  • The depressed swine ASP situation in Vietnam worsened in 2Q. Animal Protein Other losses expanded to US$12.8m (1Q17: -US$5.9m) due to chronic oversupply as China tightened its swine imports from Vietnam. Accordingly, swine ASPs fell 29% qoq to far below breakeven levels. We expect this segment to drag down the group’s FY17F bottom line as this segment is set to see another loss-making quarter in 3Q17F. 
  • We believe it will not be until 4Q17F that we witness some form of supply-demand rebalancing.

Comfeed better qoq due to seasonality but sustainability is the key 

  • Recall that Comfeed had a poor 1Q17 due to weak broiler prices from an oversupply situation. Guidance then was that Ramadan should help lift prices in 2Q and this did come true. 
  • We estimate that broiler prices improved c.20% qoq, helped to an extent by the Indonesian government’s culling efforts, in our view. However, the key question now is whether these prices can be sustained post-Ramadan. Accordingly, Comfeed’s 2Q17 9.5% OPM will need to be sustained for us to turn more positive on this segment.

What would turn us more positive? 

  • The short answer is an improved selling price environment. We think the company is facing headwinds on three major fronts: 
    1. depressed swine prices in Vietnam, 
    2. weak raw milk prices in China, and 
    3. soft demand in Indonesia. 
  • The Vietnam situation is the most serious, which also means it has the most room to improve and could quickly turn the tide for the group on an upswing. Management said they observed a pickup in swine prices since early-Jul 17, but also noted that it is still too soon to draw a firm conclusion.

Lower EPS, cut TP to S$0.55 

  • Given the weaker-than-expected showing in Vietnam, we were forced to slash our FY17- 19F EPS forecasts by 5-37%. We retain the view that it is still too early to turn positive on the stock. 
  • We will be more bullish when we see signs of improved selling price conditions. Our SOP-based TP falls to S$0.55. 
  • Upside risks: a recovery in ASPs, or better-than-expected pick-up in demand in Indonesia.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-07-28
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.55 Down 0.580