Japfa - CGS-CIMB Research 2019-12-09: Change In Swine & Raw Milk Tunes

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Japfa - Change In Swine & Raw Milk Tunes

  • Vietnam’s swine prices likely rose above VND60k/kg in Nov 19. China raw milk price increased by 8% y-o-y in Oct 19.
  • Vietnam’s swine prices could stay high amid low supply and sustained pork demand. China’s raw milk prices could rise by 3-5% in FY20F.
  • We think JAPFA (SGX:UD2) is en route to a cyclical recovery. Stock currently trades at 10x CY21F EPS below its’ 5-year average mean.

A watershed year

  • Japfa'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 c.30% y-o-y on losses in Japfa’s
    1. Indonesian broiler division, and
    2. animal protein (APO) division with the lower Vietnam swine prices in 3Q19.
  • 9M19 finance costs were also higher (+c.27% y-o-y) on interest expense for working capital facilities in the year.

2020F Outlook

  • According to Charoen Pokphand Foods (CPF TB, ADD, Target Price: THB35.00) Vietnam’s swine prices could have risen above VND60k/kg in Nov 19 vs. VND42k/kg in Sep 19 and c.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 believes 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.
  • 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.
  • We forecast Japfa’s FY20F net profit growing c.32% y-o-y on the recovery in Vietnam’s swine EBIT, and margin expansion in the dairy segment.
  • We think earnings growth impact could be especially evident in 1Q20F as Japfa benefits from the Chinese New Year/Tet celebrations in Jan 20F.
  • See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.

Maintain ADD

  • The rise in Vietnam swine and China raw milk prices have led us to believe that Japfa could be en route to a cyclical recovery which offers further trading opportunities on the stock.
  • Our Target Price of S$0.70 is based on 12x CY21F P/E (close to its 5-year average mean). 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, in our view);
    2. lower Indonesia poultry segment earnings; and
    3. wider losses in its consumer segment.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
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