Japfa Ltd - CGS-CIMB Research 2020-07-30: Lifted By Animal Protein & China Milk

JAPFA LTD. (SGX:UD2) | SGinvestors.io JAPFA LTD. (SGX:UD2)

Japfa Ltd - Lifted By Animal Protein & China Milk

  • Japfa's 1H20 net profit of US$83m (+131.8% y-o-y) was in-line at 61%/65% of our/ consensus’ FY20F forecasts, led by steady EBIT and lower tax and MI.
  • Japfa's 1H20 EBIT of US$146.6m (+7.5% y-o-y) was led by the stellar APO and dairy segments, which should continue to cushion Indo poultry weakness in 2H20.
  • We like Japfa’s prospects for the year. Reiterate ADD with unchanged Target Price, still based on 12x FY21F EPS (close to 4-year average mean).

APO and dairy mitigate Indonesia poultry weakness yet again

  • Japfa (SGX:UD2)'s 2Q20 EBIT of US$59.5m was down 22.9% y-o-y, as PT Japfa that was hit by lower poultry feed and DOC sales volumes (as a result of lower consumer spending impact from COVID-19) and weak margins due to very low ASPs for its broiler and DOC in Apr 20.
  • Nevertheless, 2Q20 core net profit was higher (+95.8% y-o-y), boosted by stellar performances in animal protein other or APO (due to still-high Vietnam swine prices) and dairy segments (due to high China raw milk prices), both of which saw 2Q20 EBIT growth (of >100% and 21% y-o-y, respectively), and which attract low effective taxes.
  • All-in, the better 1H20 EBIT, lower effective taxes and MI expenses (Indo poultry carries the most leakage) helped Japfa's core net profit grow 131.8% y-o-y to US$83m.

Vietnam swine and China raw milk prices intact; Indonesia sustains

  • According to Japfa, average prices for broiler/DOC recovered in May and Jun, and could stay flat going ahead implying the loss in 2Q may be averted in 2H20F.
  • Based on our ground checks with our Thai research team, Vietnam swine prices were trending higher than May’s VND72.7k/kg in Jun 20 due to continued supply shortage and the re-emergence of ASF in some areas. China raw milk prices are still at the Rmb3.6/kg levels.

Strategic partnership with Meiji completed in Jul 20

  • On 3 Jul 2020, Japfa completed its conditional sales and purchase agreement with Meiji for the sale of 25% of its dairy farming operations in China (AIH) for a total cash consideration of US$254m. We are positive on the deal as it improves Japfa’s net gearing position, and also solidifies a long-term relationship with an end-customer. We have already imputed the potential MI estimates for this transaction.

Reiterate ADD

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-30
SGX Stock Analyst Report ADD MAINTAIN ADD 0.960 SAME 0.960