Japfa - UOB Kay Hian 2020-12-08: Unlocking Value & Rewarding Shareholders With A S$0.10 Special Dividend

JAPFA LTD. (SGX:UD2)

Japfa - Unlocking Value & Rewarding Shareholders With A S$0.10 Special Dividend

Japfa (SGX:UD2) is selling 80% of its stake in Greenfields Dairy Singapore (GDS) for a consideration of US$236m. The transaction values GDS at US$295m or approximately 4x NAV and 21x EV/EBITDA. We view this positively as it is a massive unlocking of value and Japfa will be able to recognise gains of US$214m.
Furthermore, Japfa intends to pay an interim special dividend of 10 cents/share.
Japfa offers a total potential return of 37.6% (including 13.4% dividend yield). Maintain BUY with a higher target price of S$1.00.

On 7 Dec 20, Japfa announced that it had entered into an agreement with TPG, a leading global investment firm and Northstar Group (Northstar), a leading private equity investor in Southeast Asia to sell 80% of its Southeast Asia branded dairy business, Greenfields Dairy Singapore (GDS).
Under the agreement, TPG and Northstar will collectively hold 80% for a consideration of US$236m and Japfa will retain 20% of Greenfields Dairy Singapore (GDS). The proposed transaction is conditional upon shareholder approval, and consent of existing bank lenders. Completion is expected to take place in February next year.

We view this divestment as positive move for Japfa as the group will be able to unlock value and recognise gains of approximately US$213.7m. The proposed transaction values GDS at US$295m or approximately 4x NAV and 21x EV/EBITDA.

Japfa expects to receive approximately US$244m following the completion of the transaction, comprising cash proceeds of US$236m from the proposed transaction and US$8.0m from the repayment of a shareholder loan by GDS.
Japfa currently intends to utilise approximately US$150.0m from the proceeds to declare and pay an interim special dividend of 10 cents/share following the completion of the transaction. At current Japfa Share Price, this would increase Japfa's 2021 dividend yield from 1.2% to an attractive level of 13.4%.
The balance will be used for the payment of transaction expenses, the repayment of existing bank loans, and general working capital and corporate purposes.

Broiler and day-old chick (DOC) selling prices in Nov 20 averaged at Rp19,008 and Rp6,324 respectively. This is a significant improvement compared to an average of Rp14,595 and Rp3,320 in 3Q20 on the back of culling instructions by the government.
As at 7 Dec 20, our channel checks with Arboge show a sustained level in Dec 20 thus far with broiler and DOC selling prices at Rp19,000 and Rp7,750 respectively.

ASPs for both China dairy products and Vietnam swine remain at favourable levels. Japfa expects raw milk ASP to remain high due to undersupply in the market as 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 2-3 years later.
For the Vietnam swine business, ASP is likely to remain favourable as the African Swine Fever 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.

Maintain BUY on Japfa with a higher SOTP-based target price of S$1.00, which implies 9.0x 2020F P/E. Our SOTP-target price incorporates a lower corporate net debt as we estimate that US$40m from the proceeds will be used to pare down debt.
We highlight that at current price, Japfa offers a potential total return of 37.6 % (includes dividend yield of 13.4%).
See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.
Share price catalyst:
- Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine products.
- Reversal of rupiah weakness.

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-12-08

SGX Stock Analyst Report BUY MAINTAIN BUY 1.00 UP 0.980