JAPFA LTD. (SGX:UD2)
Japfa - Thirsting For China Raw Milk
- We like Japfa (SGX:UD2)’s acquisition of Falcon Dairy Holdings Limited (Falcon) which could see expansion of its cattle capacity by 19%.
- We expect its dairy business’ EBIT to increase by 8-23% in FY22-23F from acquisition alongside elevated raw milk prices.
- Reiterate Add with an unchanged target price of S$1.22 at target FY22F P/E of 11.5x. The stock remains cheap at 7.8x FY22F P/E (compared to peers’ 13.3x).
Details of acquisition
- The Falcon acquisition price of US$123.4m represents 1.88x of the assets’ book value as of 31 Mar 2021, and will provide Japfa with additional cattle capacity of up to 16k from Falcon’s two farms; Japfa’s existing cattle capacity is 84k from its eight existing cattle farms in China (5 in Shandong, 3 in Inner Mongolia). The Falcon valuation is at a slight discount to the 2x BV of AustAsia (AIH) when Japfa divested a 25% stake in its China dairy business to Meiji Co. Ltd in Jul 2020 for US$254m. The valuation is also within the group’s capex expectation of US$90m-95m to build a dairy farm with 10k cattle capacity.
- The acquisition will be fully funded through a debt facility, which could bring Japfa’s FY21F net gearing to 0.44x (from 0.37x); we expect the interest on debt to be similar to the existing debt profile, at ~8.3%.
Accelerated capacity expansion to capture elevated raw milk prices
- Raw milk prices remain elevated at RMB4.26/kg in Jun 2021, compared with the 10-year average of RMB3.59/kg, as supply shortages persist. Although the industry has raced to increase capacity since 2020, we expect raw milk prices to remain elevated over the next two years, as it typically takes 3-5 years to bring new capacity online. Meanwhile, the acquisition could allow Japfa to grow capacity within a shorter time to benefit from the higher raw milk prices.
Near-term earnings could be hit as new farms await turnaround
- The two newly acquired farms recorded net losses of US$4.6m in 1Q21, and could weigh on Japfa’s earnings over the next one year as the company optimises farming operations through capacity and yield management. Nevertheless, we expect operational optimisation to take a year. We therefore revise FY21F/22F/23F EPS by -3.5%/- 0.23%/+8.4%, with expectations of a business turnaround of the new farms in 2H22F; we expect the new farms to break even in FY22F and contribute full-year earnings in FY23F.
Reiterate ADD with unchanged target price of S$1.22
- This report marks a change in covering analyst. Our target price for Japfa remains pegged to 11.5x FY22F EPS; the stock continues to trade cheaply at close to -0.5 standard deviation of forward P/E.
- See
- Upside risks could include a quicker business turnaround for newly acquired farms and sustained increase in raw milk prices, while downside risks would be delayed business turnaround and weakening raw milk prices.
TAY Wee Kuang
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-07-01
SGX Stock
Analyst Report
1.12
SAME
1.12
