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

JAPFA LTD. (SGX:UD2)

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).

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.

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.

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%.

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 Price; Japfa Dividend History.
The share price is now trading at 10x CY21F P/E, below its 5-year average mean of 12.9x.

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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