Japfa Ltd - DBS Research 2019-10-31: Earnings Dragged By Indonesia & Vietnam Operations

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Japfa Ltd - Earnings Dragged By Indonesia & Vietnam Operations

  • Japfa's 3Q19 core PATMI is in line with our expectation.
  • Earnings was dragged by Indonesia and Vietnam operations.
  • Long-term outlook remains attractive.
  • Maintain HOLD call with Target Price of S$0.53.

Japfa's 3Q19 EBITDA is in line with our and consensus expectations.

  • JAPFA (SGX:UD2) reported an EBITDA of US$87.8m (-22% y-o-y) in 3Q19, bringing 9M19 EBITDA to US$290.3m (-19% y-o-y), which represents 84%/86% of our and consensus estimates. The result is in line with our and consensus expectations.

3Q19 core profit (without forex) fell 59% y-o-y.

  • Japfa’s 3Q19 headline net profit came in at US$9m (down from US$14.3m in 3Q18). Core PATMI (without forex) came in at US$11.8m, down 59% from US$28.6m. This brought the 9M19 core PATMI to US$47.5m, representing 85%/75% of our/consensus estimates. See Japfa Announcements; Japfa Latest News.
  • In the past five years, the core PATMI in 9M contributed around 85-90% of the total FY estimate.
  • The weak performance was driven by lacklustre contribution from Japfa Comfeed Tbk (JPFA), whose EBIT declined by 52.2% y-o-y to US$29.8m. The weak result was due to the slippage of broiler and day-old-chicks (DOC) prices at the end of 3Q.
  • On the other hand, the group’s Animal Protein Other (APO) segment posted a negative EBIT in 3Q19 of - US$3.6m or down by 130.5% y-o y on the back of lower swine-fattening ASP, largely due to the impact of African Swine Fever (ASF) outbreak in Vietnam.

Weak contribution from JPFA.

  • JPFA booked 3Q19 PATMI of US$7.3m (-62.5% y-o-y). JPFA’s core PATMI came in at US$5.6m (-73.9% y-o-y). The weak result was mostly caused by soft DOC and broiler prices which led to weak EBIT margins in the DOC and broiler division.

APO reported an operating loss of US$3.6m in 3Q19.

  • APO outside Indonesia contributed 3Q19 EBITDA of US$4.1m (vs US$14.4m in 3Q18). The group attributed the weak performance mainly to its Vietnamese operations which represented the bulk of its APO business.
  • In 3Q19, the Vietnam operation recorded an operating loss of US$4.3m mainly caused by low swine-fattening ASP from pre-emptive sales of swine located in high-risk ASF areas, and low poultry ASP due to an oversupply in the market. While the poultry sector in Myanmar remains competitive; as the revenue improved by 10% y-o-y mostly driven by the growth in poultry feed sales volume and improving profitability on the back of lower feed raw material costs.

Improvement in dairy segment.

  • Japfa’s dairy segment revenue grew by 20.5% y-o-y to US$123m in 3Q19. This segment recorded a strong improvement in operating profit of US$22.1m (+44% y-o-y) in 3Q19. This was due to higher raw milk prices (+13% y-o-y) in China arising from low milk supply especially during summer.

Consumer food EBIT is positive in 3Q19.

  • The consumer food segment’s EBIT contribution moved into positive territory in 3Q19 at US$1.3m due to lower chicken input costs from a loss of US$5.6m in 3Q18.

Valuation and Recommendation

Maintain our HOLD call and a Target Price of S$0.53.

  • We maintain our HOLD call on Japfa as we foresee
    • continued challenges in its Indonesia operations in 4Q19 and also in FY20F, and
    • uncertainties arising from the outbreak of ASF virus in Vietnam.
  • See Japfa Share Price; Japfa Target Price.

Long-term growth but near-term cyclical headwinds in Indonesia.

  • We continue to believe in the group’s long-term prospects on;
    1. the structural animal protein consumption story in Indonesia,
    2. long-term Vietnam operation outlook, and,
    3. potential upside from the dairy segment with potential improvement in raw milk prices.
  • We expect to see its Indonesia and Vietnam operations face near-term cyclical challenges on the back of normalisation of growth (vs last year). For Indonesia, we will likely to see a pressure in DOC and broiler segment due to soft ASP. We will likely see pressure in the swine-fattening operations for the remainder of the year on the back of ASF cases.

David Arie Hartono DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-10-31
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.530 SAME 0.530