Japfa - UOB Kay Hian 2019-03-05: Concerns Overblown On African Swine Flu; Valuation Is Compelling

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Japfa - Concerns Overblown On African Swine Flu; Valuation Is Compelling

  • We think the 8% Japfa’s share price correction over the past two days in response to the African Swine Fever (ASF) in Vietnam has been overdone. The financial impact is estimated at 12% of 2018 core PATMI in an outbreak. None of Japfa’s farms have been impacted so far and Japfa could benefit from higher swine prices.
  • The significant dividend hike and recent share buyback are a strong vote of confidence. Valuation has turned more compelling at 7.7x 2019F PE, a 52% discount to peers’.
  • Maintain BUY and target price of S$0.98.


Concerns over ASF overblown.

  • Management estimated a maximum net profit impact of US$15m, or 12% of Japfa’s 2018F core net profit, if the African Swine Fever (ASF) destroys 10% of JAPFA LTD. (SGX:UD2)’s swine fattening volume and 20% of its feed volume in Vietnam. The assumptions are derived based on the situation in China so far.
  • Also, the ASF outbreak could lead to a spike in swine prices and potential exit of backyard farms which make up around 65% of the industry, allowing Japfa to increase its market share.
  • In addition, Japfa has put in place preventive measures in its swine breeding farms such as additional showers, better logistics systems and more surveillance.

Strong core net profit beats our expectation by 12%; significant dividend hike.

  • Japfa’s 2018 core PATMI exceeded our expectation by 12% and soared 676% y-o-y on a low base of 2017 when operations faced multiple headwinds - namely China’s restriction on swine imports from Vietnam and the weak poultry performance in Indonesia. The Indonesian poultry segment’s 2018 core PATMI surged 141% y-o-y due to higher ASPs for DOCs and broilers in Indonesia.
  • On the other hand, 2018 core PATMI for the Animal Protein Other (APO) segment reported a strong turnaround.

Significant dividend hike and recent share buyback a strong vote of confidence.

  • For 2018, Japfa increased its full-year dividend significantly from 0.5 S cents to 2.0 S cents, the highest level since its IPO.
  • On 4 Mar 19, Japfa bought back 300,000 shares at S$0.71 each to reflect its confidence in the business. Despite KKR’s divestment of a 3.3% stake in Japfa’s listed subsidiary in Indonesia, they remain a substantial shareholder with an 8.4% stake.


Expect 2019 growth to continue at a moderate pace.

  • The growth of the Indonesian poultry segment should continue but at a more moderated pace after a robust 2018. Although there could be potential uncertainties on swine ASPs as the first confirmed cases of ASF in Vietnam were reported in Feb 19, management estimated that the maximum net profit impact will be at less than 15% of Japfa’s 2018 net profit.
  • In addition, the disease outbreak could lead to a spike in swine prices and potential exit of hybrid and backyard farms which makes up 65% of the industry, allowing Japfa to capitalise the shift in market share. Moreover, Japfa has put in place stringent bio-security measures to minimise such threats.


  • We raise our 2019-20 net profit forecasts by 5.4-5.8% after raising our net profit forecasts for the Indonesian poultry and APO segments on better-than-expected ASPs and operating margins.
  • Risks include unfavourable forex rates, demand supply imbalances for key proteins, prices and availability of feed raw materials, competition and animal disease outbreak.


  • Maintain BUY and SOTP-based target price of S$0.98, which implies 10.7x 2019F PE, a 33% discount to peers’ 15.9x.


  • Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine.
  • Reversal of Rupiah weakness.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.980 SAME 0.980