Japfa Ltd - CGS-CIMB Research 2019-11-19: Ride Along

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Japfa Ltd - Ride Along

  • Vietnam swine prices may be above VND60k/kg in Nov 19, and stay at this level until FY20F. We expect China raw milk prices to rise 3-5% in FY20F.
  • The rise of these two commodity prices implies that Japfa could partially recover in FY20F. Hence, we lift our FY20-21F EPS by 19.7-25.0%.
  • Maintain ADD. We raise our Target Price to S$0.70, still based on 12x FY21F EPS (close to 5-year average mean).

Vietnam swine prices rise above FY18’s high in Nov 19

  • According to Charoen Pokphand Foods (CPF TB) Vietnam swine prices could have risen above VND60k/kg in Nov 19 vs. VND42k/kg in Sep 19 and VND50k/kg in Oct 19. This is the highest in the past five years (FY18’s high was c.VND51.6k/kg). Our Thai CPF analyst thinks the high prices could be sustained for at least another year as the lifecycle to rear a swine has stretched beyond 10 months, after the culling in Vietnam.
  • The higher prices could lift JAPFA (SGX:UD2)’s Animal Protein Other (APO) segment earnings closer to FY18’s EBIT of US$33m, in our view. Hence, we raise our FY20-21F EBIT forecasts to US$30m p.a.

Raw milk prices may rise in FY20F

  • In Oct 19, China’s raw milk prices rose by c.8% y-o-y on better demand from downstream China milk producers which have been upgrading their product portfolios. Our HK consumer analyst expects raw milk prices to rise by 3-5% in FY20F, lending a positive bias to Japfa’s dairy segment which saw its dairy EBIT rising more than 40% y-o-y to US$22.1m in 3Q19 (3Q18:US$15.3m) and 9% y-o-y to US$56m in 9M19. We lift our FY20- 21F dairy EBIT to US$82m-86m.

Raising FY20-21F EPS

  • We think the potential uptick in Vietnam swine prices and sustained dairy earnings could compensate for the sluggish Indonesia poultry segment.
  • We expect Indonesia poultry to trend at FY17 levels, i.e. when poultry was in oversupply. Our higher EBIT forecasts and better operating leverage lift our FY20-21F EPS by 19.7-25.0%.

Maintain ADD with a higher Target Price of S$0.70

  • We raise our FY20-21F EPS forecasts by 19.7-25.0% due to higher Vietnam swine prices and higher China raw milk prices as well as better operating leverage. We lift our FY20-FY21F EBIT by 9-11.2% for the same reason. See Japfa Share Price; Japfa Target PriceJapfa Dividend History.
  • The share price is now trading at 10x CY21F P/E, below its 5-year average mean of 12.9x.

Catalysts and risks

  • Japfa’s businesses are highly cyclical. Potential catalysts are better:
    1. poultry operating matrixes, and
    2. margins for all its segments.
  • Downside risks are
    1. downturn in Vietnam swine prices (unlikely before the Tet holiday in Jan 20F);
    2. lower Indonesia poultry arnings; and
    3. wider losses in its consumer segment.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-19
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