SINGAPORE (Jan 24): CIMB has initiated coverage for Japfa with an “add” recommendation and a target price of $1.53, as the stock proves to be a proxy to the rising middle class in Asia.
Japfa is an industrial agr-food companies and it supplies meat to Indonesia, Vietnam, Myanmar, India and China.
CIMB’s Jonathan Seow noted that the group operates in markets where meat consumption or income levels are still below global average. “Hence, we like Japfa as a play that is poised to capitalise on the growing consumption and rising income in Asia’s most populous countries,” said Seow in a note on Monday.
In particular, Seow points out that Japfa’s core animal feed distribution business is very stable and provides a “base level of profits and is margin proof”. Japfa’s feed operating margins ranged between 10% and 12% for FY13 to FY15, in spite of currency fluctuations and Seow has forecasted feed margins to continue to be in the range of 10% and 13%.
At the same time, earlier problems of an industry oversupply of live birds and chicks that drove down prices have since been fixed. In late 2015, the government initiated culling programme in Thailand reduced livestock supply by more than 10%, which helped prices recover, and brought the group’s breeding and farming segments return to the black.
Growth in Japfa could potentially come from its dairy business in China where Japfa’s yields are 80% above the industry average, sales volumes are up 23% over the past nine months, and capacity is expected to increase by 15% by FY18.
“The only mitigating factor is a weak raw milk price environment, but we see this segment driving earnings growth for the group upon a milk price recovery,” said Seow.
Furthermore, he points out that the stock currently trades at an undemanding seven times FY17 earnings, which is below its peers who trade at 11 times earnings.
To that end, the brokerage has a target price of $1.53 for the stock.
Shares in Japfa are trading at 97.5 cents on Tuesday.
