Japfa Ltd - UOB Kay Hian 2019-07-31: 2Q19 Uncertainties In Two Key Segments; Downgrade To HOLD

JAPFA LTD. (SGX:UD2) | SGinvestors.io JAPFA LTD. (SGX:UD2)

Japfa Ltd - 2Q19: Uncertainties In Two Key Segments; Downgrade To HOLD

  • JAPFA LTD. (SGX:UD2)'s 2Q19 core net profit declined 56% y-o-y, missing more than 50% of our and consensus’ full-year estimates. The miss was mainly due to low broiler ASP in Indonesia and low swine ASP in Vietnam.
  • We slash our 2019-21F EPS by 24-25% and our target price by 34%. The uncertainties from African Swine Fever in Vietnam and demand supply imbalances in Indonesia could be the near-term overhang for earnings and share price.
  • Downgrade to HOLD with a lower SOTP-based target price of S$0.48.
  • Entry price: S$0.42.



2Q19 RESULTS


Earnings miss due to weaker-than-expected Indonesia and Vietnam operations.

  • JAPFA LTD. (SGX:UD2)’s 2Q19 core net profit declined 56% y-o-y, coming in below expectations as 1H19 only met 39% and 37% of our and consensus full-year estimates respectively.
  • The weak results were due to low broiler ASP in Indonesia on a supply-demand imbalance (the segment’s core net profit fell 44% y-o-y for 2Q19) and low swine ASP in Vietnam (the segment reported a US$2m loss in 2Q19 from US$9m profit in 2Q18) due to lower consumer demand as a result of the African Swine Fever (ASF).

Uncertainties in two key segments could translate into near-term overhang.

  • We think the uncertainties in both Indonesia poultry and Vietnam swine businesses could be an overhang for earnings. Since early-19, the Indonesia’s Ministry of Agriculture has started to cull unhatched broiler day-old chick (DOC) eggs nationwide. However, it has yet to translate into notable positive outcome, and broiler price, which has remained low in the peak season of 2Q19, has had a huge impact on 2019 core PATMI.
  • On the other hand, the Vietnam Swine segment presented a negative surprise as it turned into a loss after four consecutive quarters of profitability due to lower pork consumption as a result of the ASF. In addition, additional costs will need to be incurred for more prevention measures and it is estimated that 25% of Japfa’s farms could be hit by ASF based on the case study from China.

Decline in dairy profit due to input costs.

  • The dairy segment's core profit declined 7% y-o-y in 2Q19 due to higher feed cost of corn prices and higher cost of imported alfalfa. Also, the consumer food segment continued to report a loss due to intense competition.


STOCK IMPACT


Expect 2019 core net profit to decline y-o-y from an exceptionally good 2018.

  • The Indonesian poultry segment could face some headwinds after an exceptionally strong 2018 on good poultry ASP. In addition, there could be further uncertainties in swine ASPs and impairment as the first confirmed cases of ASF in Vietnam were reported in Feb 19.


EARNINGS REVISION/RISK

  • We slash our 2019-21 net profit forecasts by 24-26% after reducing our net profit forecasts for the Indonesian poultry and Vietnam swine segments on lower-than-expected ASPs and operating margins.
  • Risks include:
    1. unfavourable forex rates,
    2. demand-supply imbalance for key proteins,
    3. prices and availability of feed raw materials,
    4. competition, and
    5. animal disease outbreak.


VALUATION/RECOMMENDATION

  • Downgrade to HOLD with a lower SOTP-based target price of S$0.48, which implies 10.5x 2019F PE.
  • Entry price is S$0.42.


SHARE PRICE CATALYST

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





John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-31
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.48 DOWN 0.730



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