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Slow recovery expected for Japfa's Indonesian and Vietnamese markets: analysts

Felicia Tan
Felicia Tan • 3 min read
Slow recovery expected for Japfa's Indonesian and Vietnamese markets: analysts
The strong performance in Japfa's China dairy operations could help mitigate its short-term headwinds in Indonesia and Vietnam.
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CGS-CIMB Research analyst Tay Wee Kuang has kept “hold” on Japfa with an unchanged target price of 77 cents.

Tay’s report on Oct 29 comes after the regional food producer reported earnings of US$113.9 million ($153.5 million), down 12.4% y-o-y for the 3QFY2021 ended September.

During the period, Japfa faced a double whammy on poultry margins in Indonesia and Vietnam due to the spike Covid-19 cases, which led to lockdowns in both countries.

To this end, Tay expects margins to remain tight in the near-term as cost pass-through has been delayed owing to weakness in consumption patterns.

Swine prices, which fell 27% y-o-y in the 3QFY2021, also affected Japfa’s results, although Tay believes swine prices will stabilise at lower levels given the narrowed demand-supply gap.

See: Japfa disposes of 7.5% equity stake in subsidiary AustAsia for $117.9 mil

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While Tay sees upside for Japfa as being able to weather the downcycle in the poultry and swine segments due to its larger scale and lower cost base, the group’s outlook “remains clouded by uncertainty”.

“Operationally, Japfa’s sales volume has been relatively insulated from demand shocks within the industry, which could potentially translate to a gain in market share as market conditions improve,” writes Tay.

In an Oct 26 report, DBS Group Research analyst Cheria Christi Widjaja has maintained “buy” on Japfa with a lower target price of 89 cents from $1.05 previously.

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The lower target price implies 7.5 times FY2022 of the counter’s price-to-earnings (P/E) ratio.

“Our target price of 89 cents is based on sum-of-parts valuation. We pegged our valuation of Anima Protein Indonesia to our target price for Japfa Comfeed Indonesia (JPFA) at Rp2,180 (20.6 cents), while valuations of its Animal Protein Others and Dairy are based on FY2022 EV/EBITDA,” she writes.

Based on Japfa’s traded price of 74.5 cents as at Oct 25, Widjaja deems its valuation “attractive” at 4 times EV/EBITDA and 6 times P/E.

“The market is ignoring the group's long-term prospects on growing consumption of animal protein and its geographical diversification,” she says.

“Trading at a 4 times FY2022 EV/EBITDA and 6 times FY2022 P/E, this food supply play is a bargain if we compare to the average of regional peers in the animal protein and dairy sector at a 10 times FY2022 EV/EBITDA and 14 times FY2022 P/E,” she adds.

That said, Widjaja sees the counter facing temporary headwinds in Indonesia and Vietnam due to the implementation of stricter movement restrictions.

However, the continued strong performance in its China dairy operations will help mitigate the weaknesses in the Southeast Asian segments, she notes.

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The way Widjaja sees it, Japfa’s geographical diversification will benefit the counter in a cyclical industry, which will help to mitigate fluctuations.

For more stories about where the money flows, click here for our Capital section

Meanwhile, potential downsides include a surge in Covid-19 cases, higher-than-expected raw material costs, weaker-than-expected consumer demand and an outbreak of diseases, all of which could lead to volatility in prices.

As at 4.12pm, shares in Japfa are trading 1.5 cents lower or 2.19% down at 67 cents, or 0.8 times FY2021 P/B and 1.3% dividend yield, according to DBS's estimates.

Photo: Japfa

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