Japfa - DBS Research 2020-06-30: Staying The Course On Diversification

JAPFA LTD. (SGX:UD2)

Japfa - Staying The Course On Diversification

Expecting weaker 2Q20 performance from its Indonesia poultry operations; but stronger contribution from Vietnam and China operations to offset weakness.
Trimmed earnings by 12% on revision on Indonesia poultry, offset partially by higher swine prices assumed.
Target Price revised marginally to S$0.82.
Maintain BUY on Japfa as valuation remains attractive.

We maintain our earlier positive prognosis on the benefits of Japfa (SGX:UD2)’s geographical diversification. Following on from our last note on 15 May 2020, our thesis remains; and, we expect its Vietnam swine and China dairy operations to help mitigate weakness in its Indonesian poultry operations.
We maintain our BUY recommendation on Japfa with a revised Target Price of S$0.82 as we trimmed our forecasts by 12%/3% for FY20F/21F on the back of weaker contributions from JPFA, mitigated partially by increased contribution from its Vietnam swine operations due to elevated swine prices.

We have just trimmed our JPFA recommendation to HOLD, from BUY, with a revised Target Price of Rp1,200 (see report Japfa Comfeed Indonesia: Holding back on breeding pre-2Q results). While we had earlier envisaged a weak 2Q20 operating performance for JPFA, and a sequential improvement in 2H20, we believe the broiler and day-old chicks (DOC) price rebound seen in Indonesia thus far in May/June could only partially mitigate the effects in April.
Recall that in April, DOC and broiler prices slumped to Rp2,800/chick and Rp12,100/kg respectively. As such, we have trimmed our FY20F EBITDA and net profit forecasts for JPFA by 14% and 22% respectively. In addition, JPFA’s share price has also rallied by c.35% since our last update, and we believe it should take a breather.

Fortunately, for Japfa, swine prices in Vietnam remain healthy. We understand that swine prices in Vietnam remain high and news reports indicate that prices remain significantly above the authorities’ target of VND60,000/kg. This is still significantly higher than the levels seen a year ago (at VND30,000-35,000/kg) at the initial outbreak of the African Swine Fever (ASF) in Vietnam. Overall, this should bode well for Japfa’s Vietnam swine operations.
We also believe the trend should also bode well for industralised players given their ability to capitalise on the shortage of sows with programmes to import pure line breeders from Hypor.

Japfa held its Annual General Meeting on 25 June 2020. Its update and information shared on its slide deck (shared in Japfa Announcements) suggest that our above expectations – weak Indonesia poultry operations in 2Q20, are on track. Furthermore, it was also noted that its “Swine Vietnam and Dairy China will deliver results that are likely to more than offset performance of Poultry Indonesia in 2Q2020”.

Given our revision to JPFA’s forecasts, we have correspondingly factored that into Japfa’s forecasts. Fortunately, this is partially mitigated as we factored in a higher price assumption for swine prices in Vietnam, versus our previous expectations.
We raised our assumption for Vietnam swine fattening price to VND60,000/kg from VND55,000/kg previously. That said, this is still lower than the current market price.

Our sum-of-parts based Target Price is lowered marginally to S$0.82, as we factored in a lower value from JPFA. Our Target Price for JPFA is lowered to Rp1,200, from Rp1,400 previously. Japfa is trading at 6.1x/5.1x FY20F/21F EV/EBITDA and 11.3x/8.6x FY20F/21F PE.
See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
Whilst its Indonesia poultry operations are facing challenges, we see the positives from its geographical diversification.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-06-30

SGX Stock Analyst Report BUY MAINTAIN BUY 0.82 DOWN 0.860