Japfa Ltd - DBS Research 2020-07-30: Buoyed By Swine And Dairy Operations

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Japfa Ltd - Buoyed By Swine And Dairy Operations

  • 2Q20 robust net profit; ahead on lower-than-expected taxes.
  • Weak Indonesia poultry offset by strong performance in swine and dairy.
  • Japfa's 1H20 results continued to attest to its geographical diversification drive.
  • Maintain BUY and Target Price of S$0.82.

Japfa's 2Q20 results surged ahead.

  • Japfa (SGX:UD2)’s 2Q20 results were robust, surging by more than 7-fold to US$41.3m, although revenue dipped by 9.4% y-o-y to US$883.4m. The strong showing was due to
    1. robust contribution from its swine and dairy operations, offset by weak Indonesia poultry;
    2. reversal of fair value losses in 2Q19 to a gain in 2Q20; and
    3. lower effective taxes.
  • Excluding FX and fair value changes, core PATMI stood at US$33.1m, representing a still credible 96% y-o-y increase from 2Q19.
  • Japfa's 1H20 operating profit of US$146.6m is tracking our expectations, forming 53% of our FY20F forecast. This set of results, along with that seen in 1Q20, is an affirmation of the group’s diversification strategy, and its ability to capitalise on the price trends given its better managed operations. This is seen in its Vietnam swine operations, as well as dairy operations in China.
  • While Indonesia poultry could be a dampener, we believe this is cyclical. Trading at 6x/5x FY20F/21F EV/EBITDA, we believe the market is ignoring its diversified operations.

Weak Animal Protein Indonesia (API) performance, slipping into net losses in 2Q20.

  • Revenue from its Indonesia poultry operations dipped by 22% y-o-y to US$531.5m, arising from lower feed and DOC (day-old chicks) sales volume. Recall that in April, DOC and broiler prices slumped to Rp2,800/chick and Rp12,100/kg respectively. While prices recovered in May/ June, it was unable to mitigate the negative impact seen earlier. The saving grace was its feed segment, while experiencing volume declines, any setback was partially mitigated by lower raw material costs that helped boost margins.

2Q20 operating profit for Indonesia Poultry operations ended at US$6.1m, a 90% decline y-o-y from US$65.2m last year.

  • As a result, Japfa's 1H20 operating profit for API dropped to US$43.7m (-56.6% y-o-y). Correspondingly, PAT for 1H20 came in at US$9.7m, as 2Q20 registered a net loss of US$13.9m. Management has frozen non-essential new capex for its operations at API.

Broiler and DOC prices remained volatile.

  • Looking ahead, the outlook remains relatively uncertain given the development of COVID-19. While broiler and DOC prices posted a rebound in June, they have dropped back to Rp18,500/kg and Rp5,200/chick, respectively (from Rp23,500/kg and Rp6,700/chick), according to data from Indonesian Poultry Farmers’ Association.
  • Starting in mid-July, broiler and DOC prices have normalised to Rp15,000/kg and Rp4,300/chick levels respectively. We opine that both prices will still be volatile going forward as farmers try to adjust to the current demand situation.

Animal Protein Others (APO) helped by Vietnam Swine.

  • Following on from its strong 1Q20 performance, APO continued to shine. 2Q20 revenue rose by 21.2% y-o-y to US$188m, while operating profit surged to US$28.8m. This was a reversal from an operating loss of US0.1m seen in 2Q19, due to the start of African Swine Fever outbreak in Vietnam.
  • Swine operations continued to benefit from high pork prices, which remained at c.VND70,000, which was approximately double that of last year given the shortage of supply. In addition, given its swine breeding pyramid and ability to replenish stock faster, the sales volume of swine fattening stood at 15.8k tons (+6% y-o-y; 10% q-o-q), despite an overall industry contraction which we understood to be in region of 10-15%. This, we believe, has helped to mitigate operations in Myanmar and India.
  • According to management, its Myanmar operations did experience an improvement in 2Q20, from a quarter earlier. As a result, 1H20 operating profit showed a 356% surge to US$47.4m, with a net profit of US$43.1m.

China Dairy not impacted by COVID.

  • Despite the occurrence of COVID-19, Japfa's operations in Dairy in China were not impacted. In fact, 2Q20 revenue grew by 14% y-o-y to US$124m, helped by higher sales volume and selling prices. Raw milk sales volume in China saw a marginal 2.4% increase y-o-y.
  • In its SEA dairy operations, its Extended Shelf Life products remained relatively stable, with direct consumer sales offsetting the decline in supply to food services. Operating profit for the segment jumped by 21% to US$19.6m in 2Q20.

Consumer food continued its positive trend.

  • Consumer food posted profits, continuing on from its 1Q20 performance and turning around from its loss position in 2Q19. Revenue increase by 12% y-o-y to US$49.3m, on higher sales volume of frozen (+42%) and ambient products (+22%), given the movement restrictions enforced in Greater Jakarta. As a result, PAT for the segment ended at US$5.3m, vs. a loss of US$3.1m a year ago.

Our views

  • Maintain BUY and Target Price of S$0.82. Our thesis for the counter remains unchanged with a BUY recommendation and sum-of-parts based Target Price of S$0.82.
  • Operationally, Japfa’s performance is tracking our expectations. The slack in its Indonesian poultry operations is taken up by better performance from its APO segment, particularly Vietnam swine operations.
  • See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
  • We continue to see the benefits of its diversification efforts filter through, having seen several quarters of positive trend. We expect this to continue.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2020-07-30
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