Japfa Ltd - UOB Kay Hian 2020-04-16: Partial Divestment Of Dairy Business To A Strategic Investor

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Japfa Ltd - Partial Divestment Of Dairy Business To A Strategic Investor

  • Japfa (SGX:UD2) is divesting of 25% of its dairy business for US$254m to Meiji. We view this as a positive move as it allows Japfa to partner a renowned dairy player, unlock value to recognise US$37m gains and pare down its debt.
  • We reduce our FY20-21 core earnings forecasts by 9% and 4% respectively in view of the smaller ownership in the dairy business and Indonesia’s weaker poultry ASP.

Divesting of 25% of dairy business to Meiji.

  • Under the sale and purchase agreement signed On 15 Apr 20, Japfa announced it will sell 25% of its wholly-owned AustAsia Investment Holdings (AIH) which operates Japfa’s dairy farming business in China, to Meiji for US$254.4m cash. Additionally, AIH and Meiji will enter into a 5-year rolling contract to supply raw milk to Meiji, renewable annually.
  • We understand that Japfa supplies 5-10% of its raw milk to Meiji, and aims to grow this to around 20%.

Positive move to unlock value and pare down debt.

  • We view this partial divestment as a positive move as Japfa will be able to unlock value in its dairy business and recognise gains of US$37m. This transaction values the entire dairy business at US$1b. In addition, Japfa will use the entire sales proceeds to pare down its debt, and reduce its net gearing from 111% to 84% for 2020.

Higher target price due to higher valuation for dairy business.

  • Our target price increases by 2% mainly due to higher valuation ascribed to the dairy business. Our target price implies 12x 2020F PE.
  • Previously, we valued the segment at S$874m based on 12.0x 2020F PE. This transaction values the dairy business at 14.5x 2019 PE.
  • We are valuing Japfa’s 75% stake at US$763m, with an additional US$254m for debt repayment. On a net basis, this deal adds around US$143m to our SOTP-valuation. However, this was partially offset by a reduction in the valuation of PT Japfa due to a more challenging outlook.

Factoring in weakness in Indonesia poultry segment (PT Japfa).

  • With COVID-19 just starting to hit Indonesia, poultry ASP has declined notably. As a result, we trim the core net profit of PT Japfa by US$13m or 22% for 2020. The average broiler and DOC price in Java stood at Rp16,100/kg (-11% m-o-m) and Rp4,500/chick (+4.6% m-o-m) respectively in Mar 20, and Rp16,600 /kg (-13% y-o-y) and Rp4,100/chick (-14.2% y-o-y) in 1Q20 respectively.

Earnings Revision

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-16
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