Japfa - UOB Kay Hian 2020-05-18: 1Q20 Strong Beat & Positive Outlook For 2 Out Of 3 Segments

JAPFA LTD. (SGX:UD2)

Japfa - 1Q20 Strong Beat & Positive Outlook For 2 Out Of 3 Segments

Japfa's 1Q20 core net profit grew 164% y-o-y and beat our estimate by around 20% with robust growth across three key segments.
The outlook remains positive for the dairy and APO segments as we continue to foresee favourable ASPs into 2020. However, the Indonesia poultry segment may face challenges due to the COVID-19 outbreak, but its contribution is expected to be less significant at 24% of 2020 core earnings vs 37% in 2019.
We raise our 2020 EPS forecast by 18%.

Core net profit of Japfa (SGX:UD2)’s dairy segment grew 74.3% y-o-y, attributed to the higher y-o-y raw milk prices due to supply shortage (refer to figure overleaf). The Animal Protein Other (APO) segment’s core net profit grew 115.3% y-o-y on the back of higher swine fattening prices that compensated for the drop in sale volumes of swine fattening and feed.
Revenue from PT Japfa TBK increased 1.5% y-o-y (6% in rupiah terms), mainly from higher poultry feed and aqua feed sales volumes. Despite the fall in poultry prices and operational losses in the commercial segment, core PATMI increased 14.3% y-o-y on the back of better feed margins.
We also highlight that the Japfa's consumer food segment which is typically in a loss-making position managed to turn around with a core PATMI of US2.1m as measures introduced following COVID-19 increased the demand for frozen and ambient food products.

Up to May 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 a 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 wiill take around five years of restocking for the sector to recover.

The situation in Indonesia is fluid due to the COVID-19. Ramadan is typically the peak demand season for poultry, but this year the boost in demand during the Ramadan season is unlikely to materialise. The restrictions over people movement in Indonesia have reduced purchasing power, which is reflected by the continuing low broiler ASP environment post 1Q20.
Nonetheless, as Japfa mainly supplies chicken, which is a staple and affordable protein food, it hopes that the impact will not be drawn-out.

We raise our 2020-22 net profit forecasts by 18.1%, 19.5% and 19.0% respectively after raising our net profit forecasts for Japfa’s Vietnam swine segment and for the China dairy segment on higher-than-expected ASPs which will lead to higher operating margins. To be conservative, we also lower our net profit forecast for PT Japfa TBK to US$39.7m from US$45m for 2020 due to the low ASPs for broilers and DOC.
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Maintain BUY on Japfa with a higher SOTP-based target price of S$0.98 (previously S$0.90) after our EPS revision, which implies 10.7x 2020F PE.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-18

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