Japfa Ltd - CGS-CIMB Research 2019-05-02: 1Q19 Holding Out For ‘Lebaran’ Joy

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Japfa Ltd - 1Q19: Holding Out For ‘Lebaran’ Joy

  • JAPFA LTD. (SGX:UD2)'s 1Q19 core net profit (US$17.7m) formed 17.1%/16% of our/consensus (US$102m/US$110m) FY19F core net profit, which we deem below.
  • 1Q19 EBIT declined 20% y-o-y and 23% q-o-q, mainly due to the Indonesia poultry division which suffered from losses in the broiler segment.
  • However, 2Q is typically a seasonally strong quarter. We lower our forecasts slightly and maintain REDUCE.

Core net profit narrowed, mainly due to Indonesia poultry

  • JAPFA LTD. (SGX:UD2)'s 1Q19 core net profit narrowed (-36% y-o-y; -41% q-o-q) to US$17.7m (excluding other gains, some forex and bio asset revaluation) due to the Indonesian poultry segment which saw losses in its broiler division.
  • Higher y-o-y Vietnam swine prices kept the Animal Protein Other (APO) segment in the black, whilst dairy saw slightly lower margins and EBIT falling (-8% y-o-y/-13.4% q-o-q) due to feed costs. The consumer segment continued to see losses (refer to Fig1 in attached PDF report).

Indonesia feed margins and broiler segment the main dampeners

  • Japfa’s Indonesian poultry arm registered growth in 1Q19 revenue (+5% y-o-y/+2% q-o-q), but EBIT fell (-37% y-o-y, -25% q-o-q) as losses in its broiler division (US$18.7m) mitigated the profits from the DOC division which were still high.
  • Feed margins (c.9.4%) were also lower y-o-y due to higher corn prices, caused by a delayed corn harvest driving up prices of corn purchased in 4Q18.
  • Japfa guided that the Ministry of Agriculture effected a decree to cull unhatched broiler DOC eggs nationwide to stabilise broiler prices for the rest of the year. Broiler prices were down 11% y-o-y in 1Q19.
  • Overall, 1Q19 EBIT margin fell to 6.0% (vs. 10% in 1Q18).

Animal Protein Other (APO) still in the black; no ASF impact yet

  • APO division reported 1Q19 EBIT of US$10.5m (vs. 1Q18 loss), driven by higher y-o-y Vietnam swine prices. According to Charoen Pokphand Foods (CPF TB, Add, Target Price: THB30.25), Vietnam swine prices fell slightly to an average of VND46.5k/kg in 1Q19 (from VND49.2k/kg in 4Q18) as farmers liquidated stock due to fear of ASF, though prices stabilised to VND42k-43k/kg in Apr.
  • Japfa mentioned that none of its farms have been affected by Asian Swine Flu (ASF), but said they could at some point. It also discussed moderate-to worst-case scenarios which could have a US$15m-30m impact.

Maintain REDUCE; cautious until upturn during Lebaran

  • 2Q is typically a seasonally stronger quarter due to the Lebaran festivities; as such, there could be a sequential earnings recovery. However, given the weaker poultry showing, we lower our FY19-21F forecasts for now by 1.7-4.5%.
  • Maintain REDUCE with a slightly lower SOP-based Target Price of S$0.59. We would turn more positive if poultry operating matrices improve.
  • Potential de-rating catalysts are lower-than-expected earnings and lower margins.
  • Upside risks are stronger earnings during Lebaran and higher-than-expected margins.

Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-02
SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 0.59 DOWN 0.630