Japfa - CGS-CIMB Research 2021-07-01: Thirsting For China Raw Milk

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

TAY Wee Kuang CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-01
SGX Stock Analyst Report ADD MAINTAIN ADD 1.12 SAME 1.12