Recovery turns out to be slow
- Downgrade to HOLD with lower TP of S$0.67
- Expect 4Q21 performance to remain soft due to weaker swine prices in Vietnam and high raw material costs across countries
- Strong dairy performance in China and improvement in Indonesia’s poultry operation to mitigate the potential weakness in Vietnam’s swine operation
- Slash FY21/22F earnings forecasts by 28%/27%, as raw material costs stay elevated
Investment Thesis
Downgrade to HOLD. We downgrade our call for Japfa Ltd. (Japfa) to HOLD from BUY with a lower TP of S$0.67. Despite its cheap valuation, we expect near term outlook to remain subdued and margin pressure may linger in 2022, as raw material and logistics costs stay elevated. We cut our FY21/22F earnings forecasts by 28%/27%, respectively, to incorporate a more conservative outlook on the margin.
Lower swine prices in Vietnam. We project Vietnam’s swine operation to remain weak, dragged by softer swine prices due to the lingering impact of the COVID-19 pandemic and the resurgence of African Swine Fever (ASF) during 4Q21.
Recovery in Indonesia’s broiler prices and stable raw milk prices in China. Broiler prices in Indonesia have started to improve since 4Q21, driven by increasing chicken demand following reopening and the continuous culling programme. Meanwhile, raw milk prices in China still stay at a favourable level. Hopefully, these, could minimise the impact of Vietnam’s lower swine prices on Japfa’s overall earnings.
Valuation:
Our TP of S$0.67 is based on a sum-of-the-parts valuation. We pegged our valuation of Animal Protein Indonesia to our TP for Japfa Comfeed Indonesia at Rp2,060, while valuations of its Animal Protein Others and Dairy segments are based on FY22F EV/EBITDA. Our TP implies a 7.8x FY22F PE..
Where we differ:
Geographical diversification a benefit in a cyclical industry. There are concerns on the cyclical nature of the industry, but the group’s diversification across different geographies and proteins help to mitigate fluctuations.
Key Risks to Our View:
Surge in COVID-19 infections, higher-than-expected raw material costs, weaker-than-expected consumer demand, and outbreak of diseases, leading to price volatility.