Japfa Ltd - CGS-CIMB Research 2020-10-12: Swine & Raw Milk Mitigate Indonesia Poultry

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Japfa Ltd - Swine And Raw Milk Mitigate Indonesia Poultry

  • Average Jul-Aug 20 Vietnam swine prices were still above VND75k/kg while China raw milk prices in 3Q20 were also higher q-o-q.
  • Steady prices seen in these two segments likely helped to mitigate the weak Indonesia poultry business in 3Q20F, in our view.
  • We continue to like Japfa (SGX:UD2)’s prospects for the year. Reiterate ADD on Japfa with an unchanged Target Price based on 12x FY21F EPS (close to 4-year average mean).

Vietnam swine prices still high

  • According to Charoen Pokphand Foods (CPF TB), Vietnam swine prices rose to an average of VND80k/kg in Jul-Aug 20 (up > 100% y-o-y). Charoen Pokphand Foods’s management believes Sep 20 prices were still high at VND75k-80k/kg. This implies a still-strong 3Q20F, in our view, with the Animal Protein Other (APO) segment EBIT having already posted an earnings turnaround in 2Q20, from a loss in 2Q19.

China raw milk prices steady

  • 3Q20 average China’s raw milk prices (as at 23 Sep) of Rmb3.7/kg was up c.3.9% q-o-q and 2.3% y-o-y, lending a positive bias to JAP’s dairy segment, whose EBIT had already risen by c.21% y-o-y to US$19.6m in 2Q20 (2Q19:US$16.2m).

Indonesia poultry still weak

  • According to Japfa, average 3Q20 day-old chick (DOC) prices fell c.20% to c.Rp3.3k, while average 3Q20 broiler prices were down to Rp14.6k (-c.13% y-o-y).
  • Our Indonesia team believes weak disposable income in Indonesia due to the ongoing impact of COVID-19 could cap the demand recovery for Indo poultry in 2H20F; moreover the oversupply issue within the broiler industry still exists. We foresee 3Q20F and 2H20F prospects remaining weak for this segment.

Japfa's 3Q20F preview

  • We expect Japfa to report a 3Q20F EBIT of c.US$62m (up c.28% y-o-y), led by strong earnings from its APO and dairy segments. We see 3Q20F core net profit growing 123.0% y-o-y to US$26.3m, with the benefits of the higher EBIT being further upheld by lower effective taxes and MI (Indo poultry carries the most leakage).
  • We adjust our FY20-22F core EPS forecasts marginally, post some housekeeping adjustments, especially within the Indonesia poultry business.

Maintain ADD; diversification bears fruit

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-12
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