Japfa Ltd - CGS-CIMB Research 2019-10-31: 3Q19 Position For The Longer-Term Upcycle

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

Japfa Ltd - 3Q19 Position For The Longer-Term Upcycle

  • Japfa's 3Q19/9M19 core net profit of US$11.8m/US$47.6m (-58.7%/-48.2% y-o-y) was marginally below at 79.0%/74.7% of our/consensus full-year forecasts.
  • We had overestimated the weakness in Indonesia poultry, but weaker Vietnam swine EBIT and higher finance costs dampened the results.
  • Despite the share price gains since May we still see a longer-term trading opportunity in Japfa.
  • Maintain ADD, with a higher Target Price of S$0.56.

Weak Indo poultry, Vietnam swine losses and higher finance costs

  • JAPFA LTD. (SGX:UD2)'s 9M19 core net profit fell c.50% y-o-y to US$47.6m (excluding other gains, some forex and bio asset revaluation) as 9M19 EBIT shrank 30.2% y-o-y on losses in its
    1. Indonesian broiler division, and
    2. animal protein (APO) division with the lower swine prices in 3Q19.
  • 9M19 finance costs were also higher (+27.7% y-o-y) on interest expense for working capital facilities utilised in the year. See Japfa Announcements.

Indo poultry prices down, but government taking proactive steps

  • Japfa’s Indonesian poultry unit saw a 9M19 EBIT decline (-37.3% y-o-y) on
    1. lower feed margins; and
    2. continued losses in its broiler division.
  • 9M19 day old chick (DOC) prices averaged Rp5.1k/chick (-1.6% y-o-y), while 9M19 broiler prices fell to Rp16.9k/kg (-14.2% y-o-y). In early-Sep, the Indonesian government urged poultry breeders to cut supply by destroying or giving away 10m eggs. This proactive government measure seems to have lent support to overall poultry prices.
  • During our ground checks in Oct, we noted that DOC prices were closer to Rp6.0k/chick levels while broiler prices were at c.Rp20k/kg.

ASF hits south Vietnam and tanks EBIT but Oct swine prices are up

  • Japfa’s APO segment registered a 3M19 operating loss of US$3.6m (3Q18: US$11.7m) as the Asian Swine Flu (ASF) hit southern Vietnam where most of Japfa’s farms are located. But according to our Thai analyst, Vietnamese swine prices recovered in Oct to almost VND60k/kg (vs. VND39k/kg in Sep), according to CPF.

Weakness likely contained in FY19F, earnings to grow in FY20-21F

  • We think that the better prices for Indo poultry and Vietnam swine could be a precursor to a better FY20-21F, but given 4Q is typically a softer quarter, we cut our FY19F EPS by 6.6% largely on higher finance costs and MI (due to higher Indo poultry prices).
  • We lift FY20-21F EPS by 0.6% as we input higher EBIT margins, partly offset by higher finance costs.

Position for the longer-term, maintain ADD

  • We continue to be heartened by Indo poultry and Vietnam swine prices that seem to have bottomed in May-Jun 19, and maintain our longer-term positive view on Japfa.
  • We keep our ADD call but lift our Target Price slightly as we roll-forward our valuation to end-FY21F, still based on 12x P/E (close to Japfa’s 5-year average mean). See Japfa Share Price; Japfa Target Price.
  • Potential catalysts are better poultry and Vietnam swine operating matrices.
  • Downside risks are the reverse, as well as higher corn prices.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-31
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