SINGAPORE (June 25): Maybank KimEng expects Japfa, the animal protein supplier, to return to the recovery path with FY18E-20E profit rising back up to US$89-116 million ($121-$158 million) levels from US$16 million in FY17.
“Japfa currently trades at 9x FY18E P/E while our SOTP based target price of $0.86 implies 14x FY18E P/E, a 13% discount to peers’ 16x,” says Maybank analyst John Cheong in an initiation report published last Thursday.
The year 2017 was a forgettable one for Japfa given it was impacted by regulation and other adverse market factors that affected a number of its divisions, said Cheong. This included weak poultry performance in Indonesia due to sluggish consumption, China’s ban on pork imports from Vietnam and contagion fears of swine flu in Myanmar affecting pork consumption in parts of Asean as well.
“The likelihood of multiple adverse factors across countries occurring simultaneously again seems unlikely in our view,” says Cheong, “We expect FY18E to be a mean reversion year with core profit growing more than 400% y-o-y back to FY15 levels at least.”
“Around 70% of our FY18E EBIT forecast is derived from the relatively stable animal feed and dairy segments,” adds the analyst.
Cheong said Japfa’s integrated industrialised farming model across multiple proteins and geographies in Asia should make it a long-term winner from the secular trend of rising protein consumption in Asia’s growing middle class.
OECD estimates per capita meat consumption in some of Japfa’s key emerging markets of Indonesia, Vietnam and India at just a fraction of the levels in developed markets, despite having a middle class.
Given the positive correlation between income levels and meat consumption, Japfa estimates 11-13% CAGR in the latter over 2016-2026 for these markets. Maybank believes Japfa is well positioned to capitalise on this macro trend.
Nevertheless, Cheong said there are two company specific risks that warrant attention apart from cyclical demand-supply imbalances influencing ASPs, raw material price fluctuation and the wild cards of regulation change, disease, weather inherent to farming.
Japfa’s net gearing, at 108% for FY18E, is too high as enter into a rate hike upcycle too, in Maybank’s view. Additionally, the cocktail of key operating currencies of IDR, VND, CNY, and INR combined with some USD-linked import cost, USD financial reporting, and an SGD share price, creates an often unpredictable level of realised and translation-related volatility in reported profits.
As at 12.58pm, shares in Japfa are trading 0.5 cent lower at 64 cents or 8.9 times FY19E core earnings.
