SINGAPORE (Apr 16): Analysts are bullish about Japfa’s impending strategic partnership with Meiji Co in its China dairy business. The move will likely stabilise the agri-food company’s revenue stream and help the firm refinance loans it took out to consolidate its China operations in 2017. 

JAPFA announced that it will sell 25% of its share capital in AustAsia Investment Holdings -- which operates Japfa’s dairy farming business in China -- to Meiji, a leading Japanese dairy company, for a total cash consideration of US$254.4 million ($363.4 million). 

See: Japfa to sell 25% stake in China dairy farming business to Meiji for $360 mil in strategic partnership

Meiji is a well-recognised global brand in milk, yogurt and cheese categories. The sale of Meiji’s branded products in China is outpacing domestic dairy market expansion, as these products meet Chinese consumers’ expectations for food safety and security.

Japfa intends to use the entire profits of this transaction to finance a US$253 million term loan it took out in 2017 to strengthen its holdings in AustAsia. The partnership will enable it to strengthen its balance sheet amid cash flow pressure from the Covid-19 pandemic. UOB Kay Hian Research believes that JAPFA will be able to reduce its net gearing ratio from 111% to 84% for 2020.
Singapore-based Japfa will also sign an annually-renewable contract to supply Meiji with raw milk on a 5-year rolling basis. Meiji currently accounts for 5-10% of its present raw milk sales and Japfa eventually hopes to increase this to around 15-20%. 

“This strategic and synergistic partnership will secure the supply of quality raw milk for Meiji’s downstream operations and provide a stable revenue stream forJapfa, enabling us to build AustAsia to become the largest independent raw milk producer in China,” said Japfa CEO Tan Yong Nang. 

“We see this transaction as a favourable move for Japfa Ltd, with the entry of a credible strategic investor coupled with [a] supply contract. This would provide more certainty on the demand for its raw milk and future expansion, and at the same time enable the Group to leverage on Meiji’s growth in China,” agreed DBS Group Research analyst Andy Sim. 

Japfa’s reduced stake in AustAsia has seen some analysts predict lower core earnings and earnings per share (EPS). DBS anticipates an approximately 5% loss in EPS while Kay Hian also reduced its net profit forecast for Japfa by 9% due to Japfa’s 25% divestment. The analyst also forecasts a further 4% reduction on the back of a fall in poultry prices in Indonesia in the wake of Covid-19. 

CGS-CIMB Research’s Cezzane See, however, is more optimistic about the firm’s prospects, noting that Vietnam swine prices remained high in 1Q20 at around VND70-80/kg and that JAPFA’s dairy business has faced minimal disruption in the previous months. 

DBS' Sim moreover believes that poultry price shocks in Indonesia are temporary and that the staple profile of Japfa’s products will ensure that its earnings will remain resilient despite the ongoing pandemic. 

Analysts identified better operating metrics and prices for Indonesia poultry, China dairy and Vietnamese swine in addition to rupiah strengthening as potential upside trends for this counter. Prominent downside risks include scarcity of animal feed, potential animal disease outbreak and a demand-supply demand for key proteins. 

Nonetheless, all three research houses consulted have issued “buy” or “add” calls on Japfa. 

DBS has a target price of 84 cents on the counter, while UOB and CGS-CIMB have target prices at 90 cents and 95 cents, respectively. 

As of 3pm, shares in Japfa are trading 4.5 cents higher, or up 8.8%, at 55.5 cents.