Japfa Ltd - Maybank Kim Eng 2019-08-01: 2Q19 A Big Miss

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Japfa Ltd - 2Q19 A Big Miss

African Swine Flu, costs to blame; cut forecasts but maintain BUY

  • JAPFA LTD. (SGX:UD2)'s 2Q19 reported PATMI of cUSD5m was way below our expectation and even core PATMI (ex-F/X and bio assets fair value changes) of USD15m was half of what we were forecasting.
  • In our view, operating cost increases, some of which could be due to African Swine Flu (ASF), was primarily to blame for the big miss.
  • We cut our forecasts and Target Price to factor in higher costs but maintain BUY given the upside potential to our revised Target Price after the c28% YTD price decline in the stock.

Revenues up 8% y-o-y despite soft poultry, swine ASP

  • We had already baked in softer ASP assumptions for ID poultry and VN swine in our forecasts, the reasons cited by Japfa for the slump in 2Q19 profitability. Hence, overall revenues were in line with our estimates with 1H19 accounting for 51.2% of our pre-revision forecasts and all the three key operating segments of Japfa Tbk (JPFA IJ), APO and Dairy 1H19 revenues exceeding 50% of our FY19 segment revenue forecasts.
  • And despite the weaker poultry and swine ASPs, revenues grew 8% y-o-y driven by feed volume growth and stable feed ASPs.

But cost escalation was much higher than expected

  • The lion’s share of the PATMI shortfall versus our expectation came from higher COGS and operating costs, a large part of which was in the APO segment.
  • APO (of which Vietnam accounts for some 85-90% of the business with Myanmar, India making up the balance) posted core PATMI loss of USD1.2m versus our expectation of a cUSD7m profit.
  • At the group level, the cost escalation and resultant operating margin squeeze had to do with three factors, we believe:
    1. higher raw material input costs and higher tariffs on some imports affected by the US-China trade war;
    2. higher SG&A due to ASF; and
    3. higher financing costs due to the increase in working capital loans for higher COGS.

Cut forecasts, TP; maintain BUY

  • We have cut FY19E/20E/21E core PATMI by 30%/15%/20% to bake in higher COGS and operating costs given the unclear outcome of the US- China trade war and potentially higher elevated cost level for APO due to ASF.
  • Our revenue forecasts are virtually unchanged. SOTP-based Target Price has been cut 21% to SGD0.73 from SGD0.93 due to our forecast cuts.

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-08-01
SGX Stock Analyst Report BUY MAINTAIN BUY 0.73 DOWN 0.930