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Japfa a 'buy' as it spreads its eggs in several baskets

Samantha Chiew
Samantha Chiew5/3/2021 05:08 PM GMT+08  • 4 min read
Japfa a 'buy' as it spreads its eggs in several baskets
Analysts positive on Japfa as it spreads its eggs in several baskets
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Analysts are upbeat on Japfa following its 1QFY2021 ended March results, which saw a 37% y-o-y increase in earnings to US$35.5 million, due to growth across all segments.

Revenue for the period gained 16% y-o-y to US$1.1 billion, while operating profit surged 78% to US$149.8 million. This was attributed to significantly better profit from the group’s poultry business in Indonesia, driven by higher feed margins (Japfa managed to pass on the higher cost of raw materials) and recovered prices of Indonesia’s day-old chick (DOC) and live bird segments.

That, along with continued healthy profits from its Animal Protein Other (APO) division (11.3% y-o-y growth to US$20.7 million) and Dairy (12.3% y-o-y growth to US$26.5 million) segments, brought core net profit for 1QFy2021 to US$67.9 million, 36.1% higher than the previous year.

See: Japfa posts 37% higher earnings of US$48.5 mil for 1Q21

CGS-CIMB Research is maintaining its “add” call on Japfa with a higher target price of $1.22 from $1.18 previously.

Through channel checks, prices are still intact for Japfa. Average Indonesia DOC/live bird prices are at about 8,000 rupiah/23,000 rupiah levels in Aprril, compared to Japfa’s guided average March prices of about 7,000 rupiah/20,000 rupiah. Meanwhile, Vietnam’s average swine prices remain at VND 72,000-74,000/kg levels in April, compared to CPF’s guided average VND 75,000-78,000/kg in March.

In China, average raw milk prices remain at about RMB 4.24-4.27/kg levels in April, versus average March levels of approximately RMB 4.29/kg.

JAP has also been able to grow its Vietnam swine fattening sales volumes by 33% y-o-y in 1QFY2021 (as previous swine breeding stock replenishing efforts start to take shape) and the group hopes to maintain that y-o-y growth for the rest of FY2021.

Analyst Cezzane See says, “While the sustained high swine and raw milk prices continue to bode well for the near-term outlook of JAP’s APO and dairy segments, we think that the consistent poultry segment culling by the Indonesian government signals a turn in the segment’s prospects for FY2021.”

Hence, See has raised FY2021-2022 margins for Japfa’s Indonesian business, which consequently raises FY2021/2022 net profits by 14.5%/3.7%, respectively.

“We continue to be positive on JAP as it reaps the benefits of its diversification strategy,” she adds.

UOB Kay Hian too is keeping its “buy” call on Japfa with a target price of $1.17.

Analyst John Cheong notes that the group’s 1QFY2021 results came in better than expected, forming 31% of full-year forecast.

The turnaround in the Indonesia poultry segment was the reason for the group’s improvement in results. Core PATMI from PT Japfa TBK grew 189% y-o-y to US$31.9 million. The segment - which was a drag on earnings in 2020 - has benefitted from the government’s recent culling initiatives to stabilise poultry prices.

Management has also shared that feed margins for both poultry and aquaculture remain healthy despite a rise in raw materials costs at a global level.

Cheong is positive on the group’s outlook, especially for its APO and dairy segments.

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“Japfa’s Vietnam business continues to deliver a strong performance, making the most of its long-term strategy in swine breeding amid persistent high swine fattening prices due to the supply shortage caused by African Swine Fever (ASF) in the market,” he says, noting that APO revenue and operating profit rose 24.7% and 11.8% y-o-y respectively.

This was driven by higher fattening volumes resulting from Japfa’s ability to quickly replenish its swine stock coupled with continued elevated swine fattening ASPs.

For its dairy business, revenue increased 6.9% y-o-y to US$128.9 million and operating profit grew 12.4% y-o-y to US$26.5 million on the back of higher sales volumes and ASPs for both dairy and beef businesses.

Shares in Japfa closed flat at 92 cents on May 3, giving it a FY2021 price-to-book ratio of 0.9 times and a dividend yield of 1.1%, according to UOBKH’s estimates.

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