Japfa Ltd - UOB Kay Hian 2020-03-03: 4Q19 Strong Beat & Positive Outlook

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JAPFA LTD. (SGX:UD2)

Japfa Ltd - 4Q19 Strong Beat & Positive Outlook

• Japfa's 2019 core net profit beat our estimate by 67% with robust growth across three key pillars (dairy, APO and Indonesia poultry).
• Outlook remains positive as we continue to see favourable ASPs into 2020. Also, the COVID-19 impact on the business should be minimal as Japfa supplies staple protein foods to its domestic markets.
• We raise our 2020-21 EPS forecasts by 35% and 31% respectively. Maintain BUY with a 10% higher SOTP-based target price of S$0.88.

WHAT’S NEW

Earnings beat from robust performance in three key pillars.

• Japfa (SGX:UD2)’s 4Q19 core net profit surged 171% y-o-y, with robust growth in all three key pillars (dairy, APO and Indonesia poultry). For 2019, core net profit of its dairy segment grew 20% y-o-y due to the higher raw milk prices. The Animal Protein Other (APO) segment’s core net profit grew 27% y-o-y due to the spike in Vietnam’s swine ASP in 4Q19.
• On the other hand, the Indonesia poultry core net profit fell 32% y-o-y due to the lower poultry ASP in 2010 but recorded a strong catch-up in 4Q19 where core net profit soared 117% y-o-y.

Positive outlook, especially for dairy and APO segments.

• Up to Feb 20, ASPs for both China dairy products and Vietnam swine remain at favourable levels. Japfa expects raw milk ASP to remain high due to undersupply in the market as a result of prolonged low ASP environment which has not incentivised the building of new dairy farms. An increase in supply is likely to take a few years as a new dairy farm built today will only start producing 2-3 years later.
• For the Vietnam swine business, ASP is likely to remain favourable as the African Swine Fever (ASF) has wiped out a significant portion of China’s swine supply. Rabobank estimates it will take around five years of restocking for the farming sector to recover.
• Japfa does not see significant impact from COVID-19 on its business due to the nature of its business in supplying staple protein foods to its domestic markets.

Indonesia poultry should see stable ASP due to active government intervention.

• Since 3Q19, the Indonesia’s Ministry of Agriculture has put in place additional culling measures. Since then, we have seen a sustained recovery in broiler ASP throughout 4Q19 and 1Q20. In Feb 20, the government continued to mandate more aggressive culling (60m eggs in Feb 20 vs 39m eggs in Jan 20) and the Minister of Trade has set a reference price for broiler at Rp19,000-21,000/kg. It is also regulating the prices for day-old chicks for the first time in setting a reference price of Rp5,000-6,000/chick.

EARNINGS REVISION/RISK

• We raise our 2020-21 net profit forecasts by 35% and 31% respectively after raising our net profit forecasts for Japfa’s Vietnam swine segment and marginally for the China dairy segment on higher-than-expected ASPs which will lead to higher operating margins.
• Risks include:
  1. unfavourable forex rates,
  2. demand-supply imbalance for key proteins,
  3. prices and availability of feed raw materials,
  4. competition, and
  5. animal disease outbreak.

VALUATION/RECOMMENDATION

• Maintain BUY with a higher SOTP-based target price of S$0.88 (previously S$0.80) after our EPS revision, which implies 11x 2020F PE.
• See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.

SHARE PRICE CATALYST

• Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine products.
• Reversal of rupiah weakness.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-03-03

SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 UP 0.800