Excerpts from CGS-CIMB report

Analyst: Tay Wee Kuang

Japfa Ltd
Application to list China dairy business
■ JAP announced that its China dairy business, AustAsia Investment Holdings (AIH), has submitted an application to list on the Hong Kong Stock Exchange.


Share price:
72 c

81 c

■ The listing could realise a valuation of up to US$730m (at 62.5% stake in AIH) for JAP shareholders based on JAP’s precedent transactions in FY21.

■ Upgrade to Add; change valuation methodology to sum-of-parts (SOP) from P/E after evaluating potential value to be unlocked from listing AIH.

Trying to unlock value through listing China dairy business
We believe that JAP could crystalise AIH’s total equity valuation of US$1,168m, which we derive from the sale of a 12.5% stake in AIH to private companies Genki Forest Technology Group Holdings, Honest Dairy Group Co. Ltd, and GGG Holdings Limited undertaken by JAP in FY21.

Japfa CEOJapfa CEO Tan Yong Nang. Photo: CompanyThe valuation translates into a forward EV/EBITDA and P/E ratio of 11.6x and 13.1x, respectively (Fig 1), which appears to be a premium over its China dairy farming peers’ 4.7x and 5.3x, respectively (Fig 2).

Nevertheless, we believe the premium is a result of several factors, including:
(1) best-in-class milk yields (Fig 3) among industry players as well as
(2) an increasing portion of downstream businesses for AIH (Fig 4), which could suggest a shift in valuations closer to downstream players moving forward.

Furthermore, the persistent demand-supply gap continues to support buoyant raw milk prices (Fig 5) that are able to offset rising feed costs, with increasingly limited land suitable for cattle farming.

Implied valuations of remaining business not too shabby either
Stripping away the potential equity value of US$730m (at 62.5% equity stake in AIH) that could be realised through AIH’s IPO, the current share price suggests a remaining equity value of US$358.5m, which translates into an implied FY23F EV/EBITDA and P/E ratio of 4.3x and 4.4x, respectively (Fig 6), which we think is attractive, even though short-term profitability could be affected by margin pressures as a result of rising raw material prices.

While the Indonesia poultry business returned to the black in 4Q21, other operating countries, including Vietnam and Myanmar, remained affected by extenuating business conditions. Nevertheless, we expect the current downcycle to pass by FY23F.

Upgrade to Add with TP of S$0.81 on change in valuation method
We switch our valuation method from P/E valuation to SOP as we believe the potential listing of AIH could be value-unlocking for shareholders. Our SOP valuation consists of S$0.48/share for AIH, benchmarked to JAP’s sale-of-stake transactions in FY21, as well as 6x FY23F P/E (Fig 7), about 0.5 s.d. below its 5-year historical mean, for the remaining animal protein business.

We previously valued the entire business at 7x FY23F P/E; we believe valuations may not be as rich for the animal protein business compared to the China dairy business.

We remain on the lookout for the indicative new share issuance from AIH’s listing that could dilute existing JAP shareholders’ stake in AIH.

Re-rating catalyst: higher valuations from AIH; downside risks: delayed IPO timeline and extenuating business conditions persisting.

Full report here

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