JAPFA LTD. (SGX:UD2)
Japfa Ltd - Postcards From Saigon
Takeaways from Japfa Vietnam farm visits
- We visited JAPFA LTD. (SGX:UD2)'s swine & poultry parent stock farms and a feedmill on an analyst familiarisation trip.
- Vietnam accounted for 10% of FY17 revenue, which we expect will grow to c13-14% in FY20 driven by the recovery in swine and continued steady growth in the feed.
- The site visits aside, roundtable discussions centred on the key roles genetics and biosecurity play in operations.
- We expect Indonesian elections, IDR, commodity prices to provide continued tailwinds to Japfa’s stock price; maintain BUY.
Share gains from unorganised sector a major driver
- Vietnam’s protein consumption has grown rapidly over the past decade in conjunction with its GDP growth. Animal protein consumption in Vietnam is already at 50kg per capita.
- We expect growth for the industry going forward to moderate to low-to-mid single digit levels. However, industrialised farming companies should continue to benefit from the bigger opportunity of a market share shift from hybrid and backyard farms that still make up c65-70% of the industry.
Stringent biosecurity practices
- We experienced first-hand Japfa’s biosecurity practices.
- The first line of defence is isolation and the farms visited were located seemingly in the middle of nowhere – each entailing c6 hour round trip travel from Ho Chi Minh City (and these were the ones closest to the city). The second line of defence involved minimising carrier contact risk at the farm – i.e. two rounds of disinfecting showers with all personal effects sterilised in ultraviolet radiation chambers before entering the ‘clean’ zone. The animal stock is also spread in small batches across numerous isolated barns for biocontainment in the event of any outbreak.
- An immediate concern in Vietnam is the risk of African Swine Flu (ASF) being transmitted from China where it has spread across numerous provinces.
- Refer to the PDF report attached for more details on the site visit.
Genetics is a key pillar of Japfa’s operational DNA
- Japfa’s tie-up with Hypor, one of the world’s leading suppliers of swine genetics reflects the company’s philosophy in animal husbandry to source the best gene pool for biologically balanced and economically profitable stock. It is a combination of this focus on genetics and other productivity measures that allow Japfa to be amongst the lowest cost producers in the market (and hence more resilient to protein price cycles).
Investment thesis and valuation
- 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 of Indonesia, Vietnam, Myanmar, India and China. Per capita protein consumption is still low in most of these countries relative to developed western markets with potential to grow with a growing middle class.
- Japfa’s operations have delivered a stronger-than-expected rebound in 9M18 from the low base of 2017 when operations were hit on multiple fronts. Indonesian poultry was hurt by weak demand and an oversupply situation, while in Vietnam swine operations were hit by a sudden ban on imports by China; in both Vietnam and Myanmar poultry demand was also depressed due to H1N1 avian flu concerns.
- We expect the operational strength to be sustained in the near term, specifically from tailwinds from 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 previous presidential election in 2014, live bird / broiler ASPs rose c.5% y-o-y during 1H14 despite a supply glut;
- MKE’s currency strategist’s forecast of appreciation in the IDR vs. USD in 2019 is driven by a combination of factors (BI raising policy rates by 175bps since May-18, 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, and 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 JPFA to USD reporting for JAP;
- Soybean meal, a key input component for animal feed, has witnessed a price correction since Mar-2018 which, based on our estimates of JAP’s raw material inventory cycles, should aid feed margins in the coming 6-9 months. That said, we also note that feed margins are fairly stable over the long run given JAP’s ability to largely pass on 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 prices growing incrementally for the past three months could potentially imply the threat from European imports is stabilising and we could see better ASPs in FY19E.
Valuation
- Japfa is trading at 9.6x FY19E P/E, a 28% discount to its closest regional mid-cap peer PT Malindo Feedmill Tbk (MAIN IJ; IDR1,675; NR) and a 24% discount to its subsidiary PT Japfa TBK (JPFA IJ; IDR2,840; NR). The basket including large caps with over USD2b market cap trades at a much higher c.22x average FY19E P/E.
- Our SOTP-based target price of SGD0.99 after factoring in a 10% holding company discount equates to a 23% price return potential.
- Moreover, at current stock prices, after excluding Japfa’s 52.4% stake in subsidiary PT Japfa TBK, the residual market cap is marginally negative indicating that the market is not ascribing any value to Japfa’s profitable Dairy and AQPO businesses that typically account for c 30-35% of group PATMI (i.e. ex-FX and fair value adjustments for biological assets).
Japfa in Vietnam
History and milestones
- Over 20 year presence in Vietnam starting in 1996 as a feed and poultry JV operation in North Vietnam
- Expanded feed and poultry operations in South Vietnam in 2005.
- Entered the swine market in 2011 with a Great Grandparent JV with Hypor, a Dutch multinational company, and one of the world’s leading suppliers of swine genetics.
- Started swine growing and commercial production in 2012.
Market position
- Amongst top three largest industrialised farming companies in swine (MKE est.)
- Amongst top six industrialised farming companies in poultry (MKE est.)
Facilities
- Feed: Five feedmills for poultry and swine feed
- Swine: One Great Grandparent, six Grandparent farms and 22 Parent farms. Over 300 company and contract fattening farms
- Poultry: One Grandparent and 12 Parent farms. Over 300 company and contract commercial farms
Vietnam’s action plan for combating African Swine Flu risk
- African Swine Flu is the key area of concern for the swine industry globally. It has been difficult to contain its spread in China for almost a year now and farms in numerous provinces have been affected. Elsewhere, outbreaks in Belgian farms have resulted in neighbouring France seeking help from its military for logistical support in culling wild boars at the Belgium – France border, while Denmark is building a fence along its border with Germany to protect its livestock industry.
- There have been no reported cases of African Swine Flu in IndoChina but Vietnam’s cause for concern is justified given the somewhat porous borders in Southeast Asia and the and tribal / rural populations that live in these border regions that could potentially transmit the disease into Vietnam.
Neel Sinha
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-01-30
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