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

JAPFA LTD. (SGX:UD2)

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).

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.

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).

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.

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.

With the Vietnam swine and China raw milk segments mitigating the weakness in the Indonesia poultry segment, we reiterate our positive view on Japfa and keep our ADD call.
See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
Our Target Price for Japfa is maintained at S$0.96, still based on 12x CY21F P/E (close to Japfa’s 4-year average mean). See PDF report attached below for complete analysis.
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 2020-10-12

SGX Stock Analyst Report ADD MAINTAIN ADD 0.960 SAME 0.960