Japfa Ltd - CGS-CIMB Research 2018-09-10: Back On Higher Ground

Japfa Ltd - CGS-CIMB Research 2018-09-10: Back On Higher Ground JAPFA LTD. SGX:UD2

Japfa Ltd - Back On Higher Ground

  • We turn positive on Japfa as we believe the recent recovery in both its Indonesian poultry and swine fattening divisions is sustainable.
  • A potential benign poultry supply industry could likely keep prices robust for longer and benefit PT Japfa Comfeed.
  • Its swine fattening division could also stay profitable as current ASP uptick appears to be due to domestic consumption compared to external influences previously.
  • Upgrade from Reduce to ADD with a higher SOP-based Target Price of S$0.80 due to improved forward prospects. This report marks a transfer of analyst coverage.

1H18 – a bumper harvest

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  • Japfa charted a strong turnaround in 1H18 to report a core net profit of US$55.9m (excluding other gains, forex and bio asset revaluation). 2Q18 is typically seasonally strong but Comfeed was buoyed by especially high feed margins and average selling prices (ASP) for day-old chicks (DOC) and broilers.
  • Meanwhile, the turnaround in fortunes of its swine fattening business brought the Animal Protein Other (APO) segment back to the black.

Still time to ride the chicken run

  • According to our Indonesian poultry analyst, post five culling exercises in FY17 and the ban on antibiotic use in poultry feed in Jan 18, Indonesia’s poultry industry is now facing a supply crunch. DOC/broiler prices hit averages of Rp4.9k/Rp20k in 8M18 and our team believes prices could stay robust (vs. FY17’s average: Rp16.9k) as supply should remain benign for at least the next two years given that the growth cycle of grand-parent stock (GPS) to broiler is c.2 years and locals prefer fresh poultry vs. frozen imports.

Vietnam swine woes finally abate; ASPs likely stayed high

  • According to our Charoen Pokphand Foods analyst (Rating: Add, Target Price: THB27.25), average 2Q18 Vietnam swine prices recovered strongly to VND49.5k/kg, likely on supply shortages after farmers abandoned swine breeding following a plunge in swine prices in FY17 (-38% y-o-y).
  • Our Vietnam team, in a note on Dabaco Group (Not Rated), also mentioned that the rally in current hog prices could be more sustainable (vs. a temporary hike in Jul 17) as it now seems to be driven by domestic demand.

Keeping its milk cards closer

  • We are positive on Japfa’s stake acquisition in AustAsia in Apr 18 (for US$263m in cash and shares), which gave it full control (62% stake previously), despite the raised group debt profile (0.7x in FY17 to 1x in 1H18), as it removes the minority interest (MI) leakage on a business that contributes the healthiest operating profit margins notwithstanding the soft raw milk prices in China.

Upgrade to Add

  • Given the reasons above, we feel that Japfa’s forward prospects are now on firmer footing. We transfer analyst coverage and introduce FY20F earnings forecasts; we cut our FY18/19F core EPS, with projected FY18/19/20F net profit growth of 179%/15%/5%.
  • Our new forecasts feature a CY18-20F net profit CAGR of 10.5%. Our SOP-based Target Price of S$0.80 implies 10.6x FY19F P/E; which is still undemanding vs. peers’ average of 11.8x and CY14-17 mean of 12.9x.

Key risks

  • Japfa is highly affected by fluctuations in supply and demand of its products, threats of animal-centric diseases, and forex risks due to major revenue and financing streams that are denominated in rupiah, the Vietnamese dong and Chinese renminbi.

Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-10
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