Excerpts from analyst's report

DBS Vickers analyst: Ben Santoso  

  • Japfa chick10.15Parent stock chickens used to lay eggs for DOC (day-old chicks). Photo: RHB3Q15 core earnings of US$14.1m was above US$7.4-10.1m expected

    Stronger-than-expected Japfa Comfeed contribution on top of sequentially softer contributions from other segments

    FY15F/16F earnings raised by 25%/6%; as we impute better ASP except for China raw milk prices

    BUY call reiterated on 128% upside to revised TP of S$0.90 - as we roll forward base year to FY16F


Better-than-expected earnings. Excluding changes in biological asset fair values, Japfa Limited (JAP) booked 3Q15 earnings of 14.1m (+17% y-o-y; -1% q-o-q) – ahead of expectations. This brought 9M15 core net income to US$30.0m (-26% y-o-y) – representing 84% of our initial FY estimates.

3Q15 EBITDA (net of elimination) came in at US$89.7m (+52% y-o-y; -44% q-o-q) – also ahead of US$71-76m expected range. Strong USD caused 3Q15 top line to shrink 11% y-o-y (-1% q-o-q); while COGS moderated 16% y-o-y (-4%) on lower realised raw material costs, partly offset by weaker Rupiah. 3Q15 GPM/OPM thus recovered strongly to 19.9%/9.5% from 17.3%/6.3% in 2Q15 and 15.7%/5.5% in 3Q14.

Driven by Japfa Comfeed. Earnings recovery reflects sequential jump in 57.5%-owned Japfa Comfeed (JPFA) 3Q15 core profit contribution of US$19.6m from US$1.3m in 2Q15. This was augmented by sequentially softer core earnings contributions from Animal Protein businesses outside Indonesia (US$6.8m vs. US$9.0m in 2Q15) and Dairy (US$3.3m vs. US$6.3m in 2Q15).

BUY rating reiterated  for 128% upside to our revised TP of S$0.90; as we roll forward our valuation to FY16F base year – although our EV/EBITDA target multiples remain unchanged.

In consequence to the ongoing 6m PS cull (JPFA’s share is 16%), we expect GPM to improve on lower breeding cost and stable ASP. At over 100% growth, we believe JAP remains undervalued at 6.3x forward PE.

Ben Santoso (DBS Vickers)

The strong results primarily reflect better pricing amidst modest sequential gains in volumes of Animal Feed (+1%), DOC (+9%), broilers (-1%), beef (-18%), China raw milk (+1%), and Southeast Asia branded milk (+6%), respectively. The group also posted US$5m gains from US$18m buyback of the US$225m notes due 2018 at 69 cents. 

FY15F/16F earnings raised 25%/6%, after we imputed higher Rupiah exchange rates, higher DOC/broiler ASP, notes buyback, as well as lower raw material price forecasts.

We cut FY15F/16F China raw milk ASP to RMB4.00/RMB4.10 per kg, as we believe there remain near-term challenges outside of contracted volumes – although we understand demand has started to rebound.

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