Post conference notes: POA 2022
Number of clients met: 7
Salient Points in Management Presentation:
- Strong 1H21 results, followed by weak 3Q21 performance. Japfa Ltd’s performance in 9M21 remained steady despite weak 3Q21, due to its strong 1H21. Despite the ongoing pandemic, the group recorded net revenue of US$3.4bn (+22% y-o-y) and EBITDA of US$421m (+16% y-o-y). Meanwhile, PATMI and core PATMI w/o forex dropped to US$114m (-12% y-o-y) and US$121m (-14% y-o-y) respectively, mainly due to profitability mix between different countries’ operations given Japfa owns unequal level of ownership in each operation. In 3Q21, COVID-19 flared up in Indonesia and Vietnam which are the two key markets of Japfa. Strict lockdowns led to lower broiler prices in both Indonesia and Vietnam, as well as drop in swine prices in Vietnam. On top of that, the group’s performance in 3Q21 was also impacted by higher raw material costs, which affected not only the feed margin but also the vertically integrated chain. Higher feed selling price would lead to an increase in input cost for other divisions. Meanwhile, China dairy continued to deliver strong performance in 3Q21.
- Growth prospect in emerging Asia market. Japfa operates in the major emerging Asia market (Indonesia, China, Vietnam, India & Myanmar) which have high growth potential for protein consumption given the countries’ robust GDP growth and huge population. As GDP per capita of these countries increases, there is an opportunity for people to increase their protein consumption. Moreover, Indonesia and Vietnam’s poultry meat consumption stood at 7.9kg/capita and 16.5kg/capita, which were far below Malaysia’s at 46.8kg/capita. Japfa is also well-positioned in the markets by being the second largest poultry feed and DOC producer in Indonesia, the second largest DOC producer in Vietnam, as well as the first and second largest producer of poultry feed and DOC in Myanmar respectively.
- Most efficient and lowest cost producer in China dairy. Japfa owns over 90,000 cattle in China dairy operation with the best average daily milking yield amongst its competitors. As of the end of 2020, Japfa’s average daily milking yield stood at 40.1kg/head/day. The higher yield would result to higher productivity and stronger profitability compared to its peers.
- Higher transportation cost and lower demand due to COVID-19. Starting in 2H21, Japfa’s supply chain has been impacted by higher global logistic costs which were translated into higher transportation costs for the raw materials especially soybean meal. This has pressured feed margin of the group. In addition, the COVID-19 has severely impacted demand in Indonesia and Vietnam especially in 3Q21.
- Committed to sustainability. Japfa’s mission is to be a leading provider of affordable protein foods in countries with lower protein consumption, aligned to the United Nations Sustainable Development Goal No.2: Zero Hunger. Japfa strives to embrace ESG aspects as part of everyday decision-making to achieve long term value for the group and its stakeholders. Moreover, Japfa has established the sustainability committee and sustainability pillars (e.g. efficient production system, people development, and improving nutrition). To emphasize its commitment to sustainability, Japfa commenced a life cycle assessment (LCA) of its poultry operations in Indonesia as well as issued the first Sustainability-Linked Bond (SLB) in the agri-food space in the world.
Key Data – points to watch out for:
- Recovery in Indonesia DOC and broiler prices. Following the reopening in 4Q21, DOC and broiler prices have started to improve, which hopefully can help to ease margin pressure amid higher raw material costs.
- Swine prices in Vietnam. Progressive relaxation of movement restriction as well as reopening of business in Vietnam hopefully could improve swine prices in 2022. However, supply and price disruption caused by African Swine Fever (ASF) will remain the concern.
Q&A:
- Could you update us on Indonesia corn price trends in 4Q21 and early 2022? What is your view on Japfa Tbk’s feed margin going into 2022? The corn prices in Indonesia still stay high, and the management does not expect the prices to go down anytime soon. Hence, the pressure in feed margin might continue in 4Q21 and 2022. In addition, Japfa had limited room to increase the feed selling price in 2021 given the low broiler prices due to weak demand in Indonesia amid the pandemic. In 2022, the management expects the margin pressure in feed might stay unless there is strong pick up in GDP per capita and chicken demand following the reopening, resulting in stronger broiler prices and higher ability to pass on the cost increase.
- How was the pricing trend on swine in Vietnam in 4Q21 vs. 3Q21? Is it fair to say the worst is over? Swine prices in Vietnam in 4Q21 have been affected by the resurgence of ASF. Supply has been disrupted as farmers would sell all their pigs if they found one of their pigs is unwell. This led to oversupply and drop in swine prices in 4Q21. However, the management believes that Japfa would be the least affected by ASF given it has the strongest biosecurity.
- Could you also comment on poultry price trend in Vietnam? Did the price also get affected or it could recover faster than swine? Poultry prices also got affected by the lower swine prices. In addition, poultry prices were more impacted by the COVID-19 movement restrictions as factory and schools were closed.
- On China dairy, when do you think the two new dairy farms that Japfa acquired in 2021 will positively contribute to the group’s profitability? In 2021, the management expects to turn the new farms from loss making into either breakeven or small profit as Japfa has improved the farming operations to increase the comfort of the cattle. However, it will take a few years for the new farms to have the same level of yield and productivity as Japfa’s own farms as the management must first improve genetic in their breeding operations.
- With Meiji, Genki Forest, Honest Dairy, and New Hope coming in as minority shareholders, how do you foresee your operations and plans there would change? All of these companies were Japfa’s exiting customers and downstream players in China. As they plan to expand their business, they need more supply of raw milk. Hence, they took strategic partnership with Japfa to secure proportion of raw milk that Japfa produces. In addition, by introducing Chinese strategic investors in the business, Japfa is not 100% foreign company anymore. Adding local participants will help Japfa’s future aspiration on investing more in China dairy operation.