Japfa - CGS-CIMB Research 2020-12-07: Divesting 80% Of Greenfields Dairy

JAPFA LTD. (SGX:UD2)

Japfa - Divesting 80% Of Greenfields Dairy

Japfa (SGX:UD2) has entered into a conditional Share Purchase Agreement (SPA) to sell Greenfields Dairy Singapore Pte Ltd (GDS) for a US$295m consideration. GDS holds the vertically integrated branded SE Asian dairy product business.
Post deal, Japfa will still own 20% of GDS.
We are positive on the deal as valuations are favourable and it frees Japfa’s management to focus on core upstream operations.
Reiterate ADD on Japfa.

Japfa announced that it has entered into a conditional Sale and Purchase Agreement (SPA) with Freshness Holdings Ltd. (Investor) and Freshness Ltd. (the JVCo) for the effective sale of an 80% stake in its subsidiary Greenfields Dairy Singapore Pte Ltd (GDS) which holds Japfa’s “Greenfields” dairy business; a vertically-integrated business from dairy farming to branded dairy products in Southeast Asia.
The Investor is owned by affiliates of TPG and Northstar Group.
The aggregate consideration for the deal is US$295m, comprising of a cash component of US$236.0m and shares amounting to a 20%-stake in the JVCo.
According to Japfa, the US$295m consideration values GDS at c.4x NAV (based on net asset value of US$81.3m as at 30 Sep 2020); and an implied EV/EBITDA of c.21x (based on enterprise value of US$334.72m on FY19 EBITDA of US$16.1m). The group's gain from the disposal is estimated to be US$213.7m.
Japfa said the deal was performed to hasten the next phase of development for GDS’s business as the tie-up with TPG and Northstar could bring both funding and senior management expertise to further grow the business.

We like this deal as it was performed at a favourable valuation; above even Japfa’s forward EV/EBITDA. Moreover, Japfa guided it intends to utilise c.US$150m of cash proceeds for a special dividend of 10 cents/share, a significant positive.
Japfa believes it could receive US$244.m in proceeds (following the cash of US$236m and repayment of an US$8m shareholder loan by GDS).
We like that the 20% stake allows for Japfa to benefit from any upside potential of the business; but more importantly it frees Japfa’s management time to focus on its core upstream businesses that have been performing well.
We maintain our forecasts as we think the divested unit has not been a major contributor to the dairy segment’s net profit previously.

The deal is expected to be completed in Feb 2021F; hence we make no changes yet. We have been positive on Japfa as it has diversified its business to pillars that can mitigate each other’s weaknesses.
See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
We reiterate our target price of S$1.00, based on 12x PER FY22F EPS (close to Japfa’s 4-year average mean).
Re-rating catalysts are better operating metrics for all segments. Downside risks are vice versa.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-07

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