2Q22: Results In Line; Weakness From Vietnam And High Feed Costs
Japfa’s 1H22 core PATMI of US$54m (-54% yoy) was in line with our expectations, forming 52% of our full-year forecast. 2Q22 core PATMI of Indonesia’s poultry segment (-20% qoq) and China’s dairy segment (-10% qoq) fell due to high feed costs. However, Vietnam’s core PATMI improved from a US$11m loss in 1Q22 to a US$2m loss in 2Q22 due to higher sales volume of poultry and recovery of poultry prices, but the swine business remains weak due to resurgence of ASF. Maintain HOLD. Target price: S$0.63.
• Results in line with expectations. Japfa’s 1H22 core PATMI of US$54m (-54% yoy) was in line with our expectations, forming 52% of our full-year forecast. Revenue rose 10% yoy to US$2.3b, mainly driven by higher poultry prices. The core PATMI weakened as higher feed raw material costs across all segments and African Swine Fever (ASF) in Vietnam challenged operations and tightened profitability.
• Japfa TBK declined marginally qoq but showed slight improvement in APO. In 2Q22, Japfa TBK reported core PATMI of US$18m (-25% yoy/-20% qoq). Although Indonesia’s poultry ASPs have increased, profitability still remains under pressure as high feed raw material costs resulted in increased production costs across the vertically integrated operations. On the other hand, losses from the Animal Protein Other (APO) segment narrowed from a US$11m loss in 1Q22 to a US$2m loss in 2Q22 due to higher sales volume of poultry and recovery of poultry prices, but the swine business remains weak due to resurgence of ASF since 4Q21, with swine ASPs depressed by pre-emptive sales in the market.
• China dairy’s profitability affected by high feed costs. China’s dairy revenue rose 14% yoy for 1H22, driven by higher raw milk sales volumes, with the additional contribution from Farm 8 and the two recently-acquired farms in Shandong. However, core PATMI for the dairy segment fell 49% yoy to US$22m due to high feed costs, which resulted in increased production costs for both dairy and beef operations.
• All segments to face uncertainties from higher costs of raw materials and volatile ASPs. In Vietnam, swine prices in 2022 and 2021 were lower compared to 2020 when the prices were exceptionally high due to supply shortage caused by ASF. In addition, disruptions in global logistics translated into higher costs of raw materials which has led to high feed raw costs and resulted in increased production costs which may not be quickly passed on to the end-consumers.
• We maintain our financial forecasts.
• Maintain HOLD and SOTP-based target price of S$0.63, which implies 9.1x 2022F.
Suggested entry price: S$0.56.
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• Better-than-expected ASPs for Indonesia poultry, China dairy and Vietnam swine products.
• Successful value-unlocking activities such as spinning off the dairy or APO segment(s).
• Strengthening of currencies in Indonesia, Vietnam and China.