Japfa Ltd - UOB Kay Hian 2020-08-03: 2Q20 Results In Line, Positive Outlook For Two Out Of Three Segments

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Japfa Ltd - 2Q20 Results In Line, Positive Outlook For Two Out Of Three Segments

  • Japfa's 2Q20 core net profit grew 96% y-o-y (-33.8% q-o-q), with 1H20 forming 62% of our 2020 forecast. The dairy and APO segments continued to perform well while the Indonesia poultry segment reported a weak performance due to COVID-19 in Indonesia.
  • The outlook remains positive for the dairy and APO segments as we continue to see favourable ASPs into 2020. However, the Indonesia poultry segment may face challenges but its contribution is expected to be less significant, at 24% of 2020F core earnings forecast vs 37% in 2019.
  • Maintain BUY. Target: S$0.98.

Strong performance from dairy and APO segments due to higher volumes and ASPs.

  • Japfa (SGX:UD2)'s 2Q20 core net profit of the dairy segment grew 12% y-o-y, attributed to higher y-o-y raw milk prices due to a supply shortage (refer to figure overleaf). The Animal Protein Other (APO) segment’s core net profit was at US$21m vs a loss of US$2m in 2Q19 on the back of higher swine fattening prices and improving sales volumes of swine fattening and feed.
  • On the other hand, PT Japfa TBK reported a core net loss of US$4m vs profit of US$17m in 2Q19 as broiler and day-old-chick ASPs dropped to one of the company’s lowest levels (since its IPO in 2014) in Apr 19 due to oversupply in anticipation of Ramadan and lower demand due to COVID-19.
  • We also highlight that the consumer food segment which is typically in a loss-making position managed to turn around with a core PATMI of US$6.2m as measures introduced following COVID-19 increased the demand for frozen and ambient food products.

Positive outlook, especially for dairy and APO segments.

  • Up to Jul 20, ASPs for both China dairy products and Vietnam swine remained 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 will take around five years of restocking for the sector to recover.

Indonesia poultry to face uncertainties.

  • The situation in Indonesia is fluid due to COVID-19. Ramadan is typically the peak demand season for poultry, but this year the boost in demand during the Ramadan season has not materialised. The restrictions over people movement in Indonesia has reduced purchasing power, which is reflected by the continuing low broiler ASP environment in 2Q20.
  • Nonetheless, as Japfa mainly supplies chicken, which is a staple and affordable protein food, it hopes that the impact will not be drawn-out.

Japfa - Valuation & Recommendation

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-03
SGX Stock Analyst Report BUY MAINTAIN BUY 0.98 UP 0.960