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

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).

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.

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.

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.

We think strong Vietnam swine and China raw milk prices would mitigate any near-term weakness in the Indonesia poultry segment. As such, we reiterate our positive view on Japfa and keep our ADD call. Our Target Price is maintained at S$0.96, still based on 12x CY21F P/E (close to Japfa’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 prices.

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