Japfa 1Q20 - CGS-CIMB Research 2020-05-15: Stellar APO & Dairy Mitigate Poultry

JAPFA LTD. (SGX:UD2)

Japfa 1Q20 - Stellar APO & Dairy Mitigate Poultry

Japfa's 1Q20 net profit of US$49.9m (+164% y-o-y) was ahead of our/consensus’ forecasts (44.1/41.6% of FY20F) on lower tax and MI expenses.
1Q20 EBIT (+47.1% y-o-y) was strong; led by stellar growth in APO (due to higher Vietnam swine margins) and dairy segments. We lift FY20F EPS.
We like Japfa’s prospects for the year. Reiterate ADD with a slightly higher Target Price, still based on 12x FY21F EPS (close to 4-year average mean).

Japfa (SGX:UD2)'s 1Q20 core net profit of US$49.9m was ahead of our and street forecasts (S$113m/S$120m) on lower than expected tax and minority expenses. 1Q20 EBIT of US$87m (+47.1% y-o-y) was boosted by stellar performances in the Animal Protein Other (APO) segment (due to still-high Vietnam swine prices) and dairy segments (due to high China raw milk prices) which mitigated the tepid growth in PT JAPFA (+5.9% y-o-y) that was hit by losses in its Indo broiler segment.
The stellar EBIT growth, coupled with low tax expense (as Japfa’s dairy segment attracts minimal taxes, in our view) led to 1Q20 net profit growing by more than 100%.

According to Japfa, average Apr 20 prices for broiler/DOC were significantly down to Rp11.1k/Rp1.4k likely on reduced consumer purchasing power with the onset of Covid-19.
Based on our ground checks with our Thai team, Vietnam swine prices were still around VND70k/kg in Apr 20. China raw milk prices moderated slightly in Apr 20 to the Rmb3.6/kg levels but were still above the lows of RMB3.5/kg in 2015-18.

Management believes Indo poultry prices and prospects could weaken in 2Q20, but this could be mitigated by the still-strong Vietnam swine prices (due to supply shortage issues) and China raw milk prices.
We lift our FY20F net profit by 20% to account for the strong 1Q20, and as we adjust our tax and MI expenses lower.
We keep FY21-22F EPS largely unchanged as while we reduce finance costs to account for the loan repayment of US$254m, post the completion of the Meiji acquisition of a 25% stake in Japfa’s dairy segment (expected to be completed in Jul 20, see report: Japfa Ltd - RHB invest 2020-04-15: Divesting 25% Stake Of Dairy To Meiji), we have also raised our MI estimates to account for this transaction.

We think strong Vietnam swine prices and China raw milk prices will mitigate near-term weakness in the Indo poultry segment; as such we reiterate our positive view on Japfa and keep our ADD call.
Our Target Price is slightly higher at S$0.96 still based on 12x CY21F P/E (close to JAP’s 4-year average mean).
See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
Potential catalysts are better poultry, Vietnam swine and dairy operating metrics.
Downside risks are the reverse, as well as higher corn rices.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-15

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