Japfa - DBS Research 2020-12-08: Milking Its Assets Well & Lactating Cash

JAPFA LTD. (SGX:UD2) | SGinvestors.io JAPFA LTD. (SGX:UD2)

Japfa - Milking Its Assets Well & Lactating Cash

  • Japfa (SGX:UD2) proposed divestment of 80% in Greenfields for US$236m cash; to hold 20% stake in JVCo.
  • A value-realisation move; to pay out special interim dividend of S$0.10 per share, positive catalyst to Japfa's share price.
  • Transaction values Greenfields at c.21x EV/EBITDA, highlighting steep undervaluation of Japfa.
  • Current Japfa's target price at S$1.03, further upside if transaction considered. Reiterate BUY!

Divesting 80% stake in Greenfields for US$236m cash.

  • Japfa (SGX:UD2) has announced that it has entered into a Share Purchase Agreement (SPA) for a conditional disposal of its 80% shareholding in Greenfields Dairy Singapore (GDS). See Japfa's announcements.
  • This follows on from an earlier holding announcement in September 2020 that the group had received queries from third parties in relation to the above entity. For this proposed transaction, the investor is owned by affiliates TPG and Northstar Group, a private equity fund manager in Southeast Asia.
  • In the proposed transaction, the aggregate value is US$295m, and will comprise
    1. a cash component of US$236m; and
    2. shares amounting to 20% of share capital of the newly formed JVCo.
  • Japfa will retain a 20% shareholding interest in GDS following the completion. The rationale for the retention of a 20% stake is to benefit from the upside potential of the dairy business in Southeast Asia.

Valuation at 21x EV/EBITDA, gain of c.US$213.7m.

  • Based on figures disclosed, the implied valuation of the transaction is at 21x FY19 EV/EBITDA. This is based on an implied enterprise valuation of US$334.7m for GDS and an EBITDA of US$16.1m for FY19.
  • Japfa is expected to recognise a gain of US$213.7m upon completion of the deal, given the estimated book value of US$81.3m for GDS as at 30 September 2020.
  • There are various conditions precedent, including the approval of shareholders for the proposed transaction. The completion of the transaction is expected to take place in February 2021.

A special dividend windfall of S$0.10 per share; implies > 12% yield.

  • Based on Japfa's announcement, it expects to receive c.US$244m in cash following the proposed transaction. Out of this amount, it intends to utilise about US$150m to pay an interim special dividend of S$0.10 per share following the completion.
  • The balance of the proceeds is to be used for transaction expenses, repayment of bank loans, and general working capital and corporate purposes.
  • In our view, the special dividend payment is well within its means, especially given this is hot on the heels of its recent 25% divestment of its China Dairy business, which has brought its net gearing down to 0.6x as of 30 September 2020, from 1x as of 31 December 2019.

Our views

A good deal and price; 4% EBITDA contribution but transaction is at 24% of Group’s current market cap.

  • We see this development as a positive catalyst to Japfa's share price for the price valuation of GDS vis-à-vis its overall profit contribution to Japfa.
  • GDS contributes < c.4% EBITDA to the Group in FY19 and we project similar contribution in FY20F. This pales in comparison to the realized value at US$295m (for 100%) which accounts for c.24% of Japfa’s current market capitalization.

A positive catalyst for share price, materialisation earlier than expected.

  • We believe this is a positive testament to the Board and management of Japfa in its value creation and realisation. It had just completed the divestment of a 25% stake in its China Dairy business in Meiji earlier in July. Based on the announcement earlier in September on its evaluation, the proposed transaction is faster than envisaged.
  • Following this 80% divestment in GDS, it continues to show that Japfa can generate value for shareholders. We believe this should give investors further confidence and provide a catalyst for further re-rating of Japfa's share price.

Further upside to target price, BUY!

  • We are retaining our forecasts for now, given the relatively small contribution of GDS to Japfa’s profits at just c.4%. At the current Japfa's share price, our sum-of-parts target price is S$1.03 which still offers a good c.28% potential upside, even without factoring in this transaction.
  • We have valued its Dairy business (75% stake in China Dairy and 100% stake in GDS) at US$789m (8x EV/EBITDA – FY20/21F). Assuming an uplift of c.US$200m from this divestment gain, it should add c.S$0.13 per share to our target price based on our back-of-envelope calculation.
  • See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
  • Reiterate BUY!

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2020-12-08
SGX Stock Analyst Report BUY MAINTAIN BUY 1.030 SAME 1.030