Japfa - UOB Kay Hian 2020-11-02: 3Q20 Above Expectations, Positive Outlook For 2 Out Of 3 Segments

JAPFA LTD. (SGX:UD2)

Japfa - 3Q20 Above Expectations, Positive Outlook For 2 Out Of 3 Segments

Japfa (SGX:UD2)'s 3Q20 results posted a strong beat; core net profit grew 335% y-o-y, with 9M20 forming 103% of our 2020 forecast.
The dairy/APO segments continued to perform well, while the Indonesia poultry segment saw a soft performance due to COVID-19. The outlook remains positive for the dairy/APO segments with favourable ASPs in 2020.
The Indonesia poultry segment may face challenges, but its contribution is expected to be less significant at 25% of 2020F core earnings.
Maintain BUY. Target price: S$0.98.

3Q20 core net profit of Japfa’s dairy segment grew by 46% y-o-y, attributed to the higher y-o-y raw milk prices due to a supply shortage. The Animal Protein Other (APO) segment’s core net profit was at US$26m vs a loss of US$6m in 3Q19, on the back of higher swine fattening prices.
On the other hand, Japfa Comfeed Indonesia Tbk (Japfa Comfeed) reported a core net profit decline of 52% y-o-y as broiler and day-old-chick ASPs continued to remain weak due to the challenging COVID-19 environment in Indonesia.
We also highlight that the Japfa's consumer food segment, which is typically in a loss-making position, managed to turn around with a core net profit of US$5m as measures introduced following COVID-19 increased the demand for frozen and ambient food products.

Up to Oct 20, ASPs for China dairy products and Vietnam swine remain at favourable levels. Japfa expects raw milk ASP to remain high due to undersupply in the market. This is 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 start producing only two to three 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.

The situation in Indonesia is fluid due to the COVID-19 pandemic. The restrictions over peoples’ movement in Indonesia have reduced purchasing power, which is reflected in 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.

We raised our Japfa's core net profit forecasts for 2020 (+26%), 2021 (+18%) and 2022 (+18%) as we factor in higher ASPs for Vietnam swine and China raw milk. We expect raw milk ASP to remain high due to undersupply in the market. This is a result of the 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 start producing only two to three years later.
For the Vietnam swine business, ASP is likely to remain favourable as the ASF has wiped out a significant portion of China’s swine supply.
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Maintain BUY with SOTP target price of S$0.98, which implies 8.7x 2020F PE.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-02

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