Japfa Ltd - Maybank Kim Eng 2018-12-12: On A High Protein Diet

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Japfa Ltd - On A High Protein Diet

Forecasts revised up; maintain BUY

  • Fuelled by the rebound in subsidiary PT Japfa Tbk (JPFA IJ) and Animal Protein Other (APO) divisions, YTD FY18 has been far stronger than we expected. Upcoming Indonesian presidential elections, our forecast IDR appreciation and a softening in soybean meal should provide further tailwinds in coming quarters.
  • Taking stock of various protein, dairy and commodity input prices, we raise FY18E/FY19E/FY20E core profit estimates by 23%/9%/9% and Target Price (unchanged SOTP methodology and multiples) by 15% to SGD0.99.

JPFA strength likely to sustain through 1H19

  • Live bird / broiler prices were expected to recover this year from 2017 low base effects but they have remained higher for longer than expected through 9M18. Also DOC supply shortages have driven c.12% feed and c.8% DOC volume growth with strong ASPs and margins, factors that allowed JPFA to deliver growth despite the c.6% IDR depreciation.
  • We expect strength in Indonesia poultry operations to be sustained for the next 2-3 quarters from an anticipated demand uptick from election related consumer spending, our expected y-o-y appreciation for IDR:USD and margin benefits from softening soybean meal prices since 2Q18.

Vietnam swine, China dairy ASPs have surprised too

  • Animal Protein Other (APO) expectedly swung from losses through the quarters in 2017 to a profit in 2Q18 as the Vietnam’s market supply corrected for the new demand levels post China’s pork import ban. But what has surprised us is the pork ASP resilience of the past five months which suggests the market has maintained supply discipline given the scar tissue of 2017.
  • Meanwhile modest m-o-m upticks in China’s farm gate raw milk price may potentially signal that the worst of the European import threat is behind.

Specific risks in Consumer Food, FX, pork imports

  • Apart from usual ASP swings, regulation change, raw material cost, disease and weather related risks inherent to agri businesses, the specific risks to our outlook lie in the consumer foods business posting higher than forecast losses, emerging Asia currency weakness versus USD and risk of illegal Chinese pork imports into Vietnam.

Japfa investment thesis

  • Japfa’s vertically integrated industrialised farming business model leverages on scale and technology for competitive advantages. It stands to benefit from long term secular consumption growth trends with operations concentrated in highly populous and high-growth emerging economies in Asia (Indonesia, Vietnam, Myanmar, India, China) where per capita protein consumption is still low.
  • Japfa’s operations have delivered a stronger than expected rebound YTD 2018 from the low base of 2017 when operations were hit on multiple fronts with Indonesian poultry hurt by weak demand and an oversupply situation, Vietnam swine operations hit by a sudden ban on imports to China and, both Vietnam & Myanmar poultry seeing depressed demand due to H1N1 avian flu concerns.
  • We expect the operational strength to be sustained in the near term specifically from tailwinds of a few factors such as:
    • An anticipated uptick in Indonesian consumer spending in 1H19 in the run up to the presidential elections driving higher live bird/broiler volumes and ASP. Note that in the last Presidential election of 2014, live bird / broiler ASPs rose c.5% y-o-y during 1H14 despite a supply glut.
    • MKE’s currency strategist’s outlook for an appreciation in the IDR vs. USD in 2019 driven by a combination of factors (BI action to raise policy rates by 175bp since May, expectations that the Fed is nearing the end of its current tightening cycle, market optimism over a potential Jokowi victory at the Presidential election and expected follow through in macro-policies, softer oil prices). MKE forecasts a c.8% y-o-y appreciation in IDR:USD in 2019 versus the c.6% depreciation witnessed in Jan-Nov 2018. This is a positive translation factor for IDR denominated revenues of subsidiary PT Japfa Tbk to USD reporting for Japfa.
    • Soybean meal, a key input component for animal feed, has witnessed a price correction since Mar-2018 which, based on our estimates of Japfa’s raw material inventory cycles, should aid feed margins in the coming six to nine months. That said, we also note that feed margins are fairly stable over the long run given Japfa’s ability to largely pass through input costs.
    • Better-than-expected supply discipline in Vietnam which should result in higher pork ASPs in 1H19E than we had initially estimated.
    • China farm gate raw milk growing incrementally for the past three months could potentially portend a stabilisation to the threat from European imports and better ASPs in FY19E.


  • Japfa trades at 8.9x FY19E P/E, at a 30% discount to its closest regional mid cap peer PT Malindo Feedmill Tbk (MAIN IJ) and a 16% discount to its subsidiary PT Japfa TBK. (the basket including large caps over USD2b market cap trades at c.21x average). Our revised SOTP-based target price estimate of SGD0.99 after factoring a 10% holding company discount holds a 36% price return potential.
  • Moreover, after excluding Japfa’s 52.4% stake in subsidiary PT Japfa TBK, its stub valuation is a mere 1.5x FY19E P/E which suggests the other divisions to be severely undervalued as both Dairy and APO are profitable businesses and account for around a third of FY19E group core profit (i.e. ex-FX and fair value adjustments for biological assets).

Forecast and valuation changes

FY18-20E core profit raised 9-23%

  • We have made a number of forecast adjustments after taking stock of 9M18 performance on volumes, ASPs, commodity prices and currency translation impact across the various components of Japfa’s business. Below are the key changes to earlier assumptions:
    • PT Japfa Tbk: FY18-20E revenue lowered by 7%/1%/3% - this is the net outcome of higher live bird / broiler volume and ASP assumptions offset by lower DOC prices in FY19E/20E from the high levels of FY18 and revised currency impact. Segment operating margins are expected to be better than our earlier forecast by c.1-1.5ppt from lower input commodity costs.
    • APO: Vietnam port price expectations for FY19E raised from earlier average of c.VND45,000/kg to VND48,000/kg levels; however this is lower than current elevated levels of VND50,000+. We expect prices to head lower from current levels as, according to a recent Genesus Global Market report, the Vietnamese government indicated that prices below VND50,000/kg would be good for the long term growth of the industry curbing overly aggressive expansion in supply as well as limiting illegal imports of pork from China. We have kept FY20E pork price expectations unchanged y-o-y. We have raised operating margins by 1ppt in FY19E/FY20E on expectation of narrowing operating losses in Myanmar and India. An earlier than expected operating turnaround in either of these markets would be positive wild card for APO performance.
    • Dairy: Revenues raised from a combination of higher than expected milk volumes and milkable herd in China and SEA as well as c.2ppt higher ASP given the improvements in China farm gate milk prices over the past quarter. Operating margins trimmed by 1-1.5ppt from higher imported raw material costs given the CNY depreciation witnessed so far in 2H18.
    • Consumer Food: Ambient food volumes raised 2-3% over the forecast period on the back of better than expected 9M18 volume growth. But operating margin reduced 2ppt for FY19E/FY20E given that the intense competition seems unabated for now and the ASP pressure seems likely to continue for another 4-6 quarters in our view.

Target Price raised 15% to SGD0.99

  • We value Japfa on a sum-of–parts based on ascribed EBITDA multiples for its business segments of:
    1. PT Japfa TBK;
    2. Dairy; and
    3. APO and,
    4. Consumer Foods.
  • On the back of various forecast revisions, our target price after incorporating a 10% holding company discount has been raised by 15% from SGD0.86 to SGD0.99. Note we continue to not ascribe any value to the Consumer Foods business.
  • Japfa trades at 8.9x FY19E P/E, at a 30% discount to its closest regional mid cap peer PT Malindo Feedmill Tbk and a 16% discount to its subsidiary PT Japfa TBK.
  • Japfa’s stub FY19E P/E (i.e. excluding its stake in subsidiary PT Japfa TBK) is a mere 1.5x which suggests the other divisions are undervalued by the market. Dairy and APO combined account for around a third of FY19E group core profit.
  • We believe the market has yet to fully appreciate Japfa’s diversified business model due to a number of factors, such as complexity of the business, thin broker coverage, fairly short listing history and short track record of earnings.
  • We also believe this valuation gap should narrow with the market concerns over the drag of losses of the previous year in smaller business APO and consumer food reversing and narrowing, respectively.

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-12-12
SGX Stock Analyst Report BUY MAINTAIN BUY 0.99 UP 0.860