Bracing for the downcycle
? FY21 core net profit of US$132.7m missed our estimate by 14% due to higher cost pressures across business segments and extended APO losses.
? Reiterate Hold with lower TP of S$0.65; we expect softer earnings in the short-term, arising from persistent cost pressures and uncertain outlook.
EBIT margins squeezed in 4Q21
In 4Q21, JAP saw margin compression across its business units due to rising prices for its raw materials (e.g. soybean meal, alfalfa and corn) as well as higher logistics costs from extended supply chain disruptions. Its animal protein others (APO) segment saw EBIT loss widen to US$21.1m with an EBIT margin of -8.5% in 4Q21, from US$14.8m and -6.4% margin in 3Q21, while China Dairy segment saw EBIT margin ease from 20.3% to 19.0% over the same period. Indonesian Poultry turned around in 4Q21, posting positive US$59.4m EBIT from US$25.3m in EBIT losses in 3Q21 as Indonesia exited lockdowns.
Nevertheless, the Indonesian Poultry segment’s EBIT margin of 7.0% was still below the 13.5%/10.5% in the preceding quarters of 1Q21/2Q21 due to the steeper-than-expected rise in raw material prices, which resulted in a poorer ability to pass on the cost increases.
Resurgence of ASF exacerbated APO performance
In 4Q21, the resurgence of African Swine Fever (ASF) led to pre-emptive sales of swine in Vietnam, keeping swine prices weak. The stepping up of biosecurity measures to prevent operational disruptions compounded the cost pressure. Furthermore, management shared that despite the easing of lockdown measures in Vietnam, movement across certain regions within the country remains restricted, negatively impacting poultry consumption. Demand should improve amid progressive easing of restrictions ahead, in our view.
Robust sales volumes despite volatile margins
Operationally, JAP continued to deliver healthy growth in sales volumes of 8.9-42.3% yoy across various animal feed and proteins in 4Q21, which translated to robust revenue growth of 19.9% in FY21. Although extenuating market conditions could add to near-term cost pressures, we think JAP will be able to tide through the near-term headwinds given its advantage over its peers (being the most cost-efficient producer across its operating markets) and emerge from uncertainties with better footing across its business segments.
Reiterate Hold with a lower TP pending profit growth visibility
We reiterate Hold with a lower TP of S$0.65 as we roll forward our valuation, now based on CY23F P/E of 7x (vs. 9x previously), slightly below its five-year historical average to account for the expected share price weakness in the near term due to lack of profit growth visibility. We cut our FY22F EPS by 26% to reflect the persistent cost pressures, but raise FY23F EPS by 4% to account for sustained revenue growth momentum on the back of easing pressure on margins. Upside risks include a swifter easing of margin pressures; downside risks include prolonged cost pressures and deteriorating demand dynamics.