Japfa - DBS Research 2020-11-02: Surging Ahead On Animal Spirits

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Japfa - Surging Ahead On Animal Spirits

  • Japfa's 3Q20 results beat expectations on continued strong showing from Vietnam swine and China Dairy operations.
  • YTD results highlight benefits of its geographical and protein diversification strategy.
  • Raised Japfa's FY20F/21F earnings forecast by 74%/19%.
  • Counter looks like a steal at 5x EV/EBITDA, 6.4x PE; BUY with target price raised to S$1.03.

Maintain BUY, target price raised to S$1.03.

  • We reiterate our BUY recommendation and as per our previous thesis, and prefer Japfa (SGX:UD2) over its subsidiary, Japfa Comfeed Indonesia Tbk. On the back of its blowout quarter for 3Q20 arising from the stellar performance of its Vietnam swine and China Dairy operations, we raised our FY20F/21F earnings by 74%/19%. This is negated partially by a weaker than expected performance from its Indonesia poultry operations.
  • That said, overall group performance vindicates management’s efforts to diversify its operations across the different animal proteins and geography.
  • Japfa's target price is raised to S$1.03, representing 60% upside and implying c.11x PE, which is slightly above its 5-year historical mean.

Japfa 9M20 above expectations on swine and dairy operations.

  • Japfa reported a strong set of 3Q20 results with net profit at US$53.1m (+452% y-o-y). This leads to 9M20 attributable profit of US$130m, which is up almost 5x from $22.4m last year, helped by strong performances from 3 out of 4 of its operating segments – Animal Protein Others (APO, namely Vietnam swine operations), Dairy and Consumer Food. Its Indonesia operations, contributed mainly by its poultry operations, were lackluster as it was impacted by weakened demand and volatile day-old chicks (DOC) and broiler prices.

Benefits of diversification is the key highlight of 9M20 results.

  • Cutting beyond what we see on its year-to-date operational performance, the key highlight is the group’s diversification efforts and benefits. This continues to play out to our earlier thesis, particularly with Vietnam swine operations, China Dairy as well as consumer food recorded robust performance in light of respective challenges. Weaker-than-expected Indonesia operations was more than mitigated by stellar Vietnam swine and China Dairy operations.

Animal Protein Indonesia (API) –

Japfa Comfeed Indonesia (JPFA) Indonesia operations bounced back to profit in 3Q20.

  • After reporting a net loss of US$13.9m in 2Q20, API posted Profit After Tax (PAT) of US$6.8m (-53% y-o-y) in 3Q20, bringing 9M20 net profit to US$16.6m (-78.7% y-o-y). Although better compared to last quarter, earnings were still heavily impacted by the COVID-19 pandemic. The significant drop in earnings on a y-o-y basis was mainly due to operational deleveraging caused by lower sales as well as a drop in DOC and broiler prices.
  • Revenue decreased on a y-o-y basis, mainly due to lower poultry feed and DOC sales volumes in Indonesia, as COVID-19 has eroded consumers’ purchasing power and demand for chicken. Gleaning from its listed subsidiary, Japfa Comfeed Indonesia Tbk’s (JPFA) reported results, JPFA saw lower net revenue in DOC (-29% y-o-y), animal feeds (- 26%), and cattle (-41%).
  • Meanwhile, net revenue of commercial farm (including consumer products) and aquaculture segments grew by 3% and 6% y-o-y, respectively, in 3Q20.

Strong margins for animal feeds and aquaculture.

  • Animal feed reported an EBIT margin (to gross revenue) of 15.3% in 3Q20, improving from 14.2% in 2Q20 and 13.3% in 3Q19. This was driven by the group’s ability to manage cost of raw materials efficiently by doing better procurement for domestic corn during the harvest season. Furthermore, the average price of domestic corn was slightly lower in 3Q20, coming in at Rp5,739/kg (-3% y-o-y).
  • Meanwhile, aquaculture reported an EBIT margin (to gross revenue) of 8.3% in 3Q20, improving from 5.6% in 2Q20 and 6.3% in 3Q19, on the back of higher sales volumes and margins of aqua feed.

Improvement in DOC margin; back to black.

  • JPFA’s DOC segment’s EBIT margin (to gross revenue) expanded to 9.2% in 3Q20 from -22.7% in 2Q20 and 0.3% in 3Q19. In our view, this was driven by lower costs or lesser culling given the group has adjusted down volume production to reflect current low demand. In addition, we note that 3Q19 was a weak quarter due to lower DOC prices after the Lebaran season in 2Q19.
  • At the beginning of July 2020, DOC prices had hit the Rp6,000/chick level due to undersupply conditions after the full PSBB period, which also could have helped to boost margins. However, prices went down again to Rp4,000- 5,000/chick towards the end of the month as well as in Aug and Sep.

Volatile broiler and DOC prices expected to continue in Indonesia.

  • We expect prices to remain volatile in Indonesia in 4Q20 given demand is still relatively weak due to lower consumer purchasing power. However, the culling programme is key to ensuring that prices do not drop significantly. The average DOC and broiler prices increased to Rp5,500/chick and Rp16,700/kg in Oct, respectively, supported by relaxation of the PSBB in Jakarta and continuous culling programme.
  • According to the Indonesian Poultry Farmers Association (Pinsar), broiler price in the first half of Oct was about Rp15,500/kg, still quite low given the reimplementation of the PSBB in Jakarta. However, broiler price picked up in the second half of Oct, ranging Rp17,000-18,000/kg, supported by the relaxation of the PSBB in Jakarta and the continuous culling programme.

Animal Protein Others (APO)

Reversal into profit vs a year ago.

  • The APO segment continued its stellar performance from 2Q20, and posted PAT of US$26.7m in 3Q20, which is a sharp reversal from a loss of -US$2.4m in 3Q19 arising from the impact of African Swine Fever (ASF) back then. This strong performance was mainly due to higher swine fattening average selling prices, given the significant drop in pork supply in Vietnam as a result of ASF. In addition, with the group’s industrialised model, it has been able to better contain the effects of ASF and replenish its stock faster than most competitors.

Vietnam more than mitigates weak contribution from Myanmar and India.

  • While operations in Myanmar and India were also impacted by the effects of COVID-19, resulting in weaker demand for feed (in India) and lower DOC and broiler prices (in Myanmar), APO segment revenue still surged 27% y-o-y in 3Q20 driven by Vietnam operations. As a result, operating margin for the segment was 15.2%, vs a negative operating margin of -2.1% in 3Q19.

Swine prices remain high, bodes well for APO.

  • Vietnam swine prices has surged since 3Q19, and remained persistently high year-to-date in 2020. While there have been efforts by the Vietnamese authorities to moderate the high swine prices, it remains high given the shortage of supply. We understand that while prices have moderated from the highs of above VND90,000/kg earlier this year, it remains at around VND70,000/kg, which is still almost double the price at the same time last year at around VND40,000/kg. This should bode well for Japfa.
  • Japfa’s strategy of swine pyramid will continue to see benefit. As indicated in our earlier notes, Japfa has instituted an earlier strategy to build a swine breeding pyramid, starting with its own Great Grandparent (GGP) farms. This allows them to replenish its swine breeding stock faster.
  • While we expect swine selling prices to moderate from the highs seen this year, we believe Japfa’s operations is likely to remain relatively robust given its ability to grow its sales volume from its breeding stocks.


Buoyed by higher volume and prices.

  • Dairy segment posted a strong growth in revenue to US$146.5m, +23% y-o-y, arising from higher raw milk prices and contribution from its beef operations. Raw milk sales volume in China grew by 4.3% y-o-y in 3Q20, and the operations there remain unaffected by COVID-19, as seen earlier in the year. Based on our checks, raw milk ASP remains healthy at c.CNY3.80- 3.90/kg, marginally higher than that seen a year ago at c.CNY3.70/kg.

Sale of 25% stake in its China Dairy operations completed.

  • Following on from its earlier announcements, the sale of its 25% stake in its China Dairy operations has been completed for a total cash consideration of US$254.4m on 3 July 2020. The proceeds were used to fully repay the US$253m syndicated loan. Following on from the strong dairy operations, the construction of a new farm in Chifeng, Inner Mongolia (Farm 8) is in progress and management expects the farm to be fully milking by end 2021. This should continue to provide growth headroom for its operations there.

Consumer Food

Turned the corner, aided by movement restrictions.

  • Performance of its Consumer Food segment remain robust, continuing from its performance since the start of 2020.
  • While 3Q20 revenue dipped by 4% y-o-y, operating profit surged 2.5x helped by higher sales volume and lower chicken input costs. As a result, 3Q20 PAT registered US$4.8m, up significantly from last year’s US$0.6m.

Restructuring of Consumer Food.

  • As per its earlier announcement, Japfa has entered into a sale and purchase agreement with its subsidiary JPFA for the sale of PT So Good Food for a consideration of Rp1.2 trillion (or about US$82.6m). This transfer will integrate JPFA’s upstream poultry feed, breeding and mid-stream commercial farming business with the downstream consumer food business. This is also in line with the group’s plans to integrate its business within each geographical area.

Japfa - Valuations and forecasts

Raised Japfa's FY20F/21F earnings forecast by 74%/ 19%.

  • We raised our Japfa's FY20F earnings forecast by 74%, after continued strong performance of its swine and dairy operations, which more than offset the weak Indonesia poultry operations.
  • Pork prices in Vietnam has stayed high, and hovers above VND70,000/kg (reaching more than VND90,000/kg at some point), significantly higher than the average of VND60,000/kg we penciled in our assumptions for FY20F. As such, Japfa's operating margins were strong and looks likely to contribute strongly to operating performance in FY20F.

Valuations attractive, target price raised to S$1.03.

  • As a result of our raised forecasts, our target price is revised up to S$1.03 (from S$0.82 previously) largely driven by stronger contribution from its APO and Dairy operations. Our target price for JPFA remains unchanged a Rp1,200. At current Japfa share price, Japfa shares remain attractive at 5x and 6.4x FY20F EV/EBITDA and PE, respectively.
  • We believe the market is underappreciating its geographical diversification, which has shown its benefits this year on the back of the impact of COVID-19. In addition, despite the impact from ASF in Vietnam in 2019, the group has been able to bounce back stronger than before, demonstrating a strong testament of its solid operations.
  • See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
  • Reiterate BUY on Japfa with target price of S$1.03, implying 11.3x FY21PE, which is marginally above its historical average given its growing track record.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2020-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.03 UP 0.820