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Japfa Ltd - Awaiting dawn

Shared By Stock Fanatic on Sunday, March 1, 2015 | 1.3.15


Japfa’s FY14 core PATMI of US$57.7m was within our and consensus expectations. After a disastrous 3Q14, 4Q14 did not throw up any big negative surprises. 4Q Comfeed losses narrowed as Japfa reined in investment while its Indochina animal protein business chugged along nicely. In China, weak milk prices negated any positive impact from volume growth. 

We cut our FY15-17 EPS forecasts by 11-16% to reflect sustained weak milk prices in China. Our SOP target price falls. Japfa does not think the low DOC prices in Indonesia and weak milk prices in China will persist long term; we agree. Given its 9.5x CY16 P/E valuation and the likelihood of a profit rebound in 2H15 or 2016, we keep our Add rating. A sudden earnings rebound is the key potential catalyst.

Dairy profitable, but disappoints on lack of profit growth
Dairy’s 4Q core PATMI (US$3.9m) was a tad disappointing as PATMI hardly grew qoq, even as 

1) Farm 6 came on-stream, and 

2) industry best practises enabled its milk yield to improve to >12mt/cow. 

The dampener was much weaker milk prices in China. We understand that China had seen rising powdered milk imports on the back of an oversupply situation in the international market. This outweighed the milk shortage in the country. If the current environment persists, the trend of small farmers in China selling their cows to the beef market will continue; this will further exacerbate the milk shortage problem when global milk prices strengthen. According to Japfa, international milk prices have started to stabilise. The question is when China milk prices can continue their previous years’ trend of making steady gains.


Technical Analysis
Daily Chart
Comfeed almost broke even, we expected further losses
At Japfa Comfeed (Comfeed), losses have narrowed almost to breakeven point in 4Q14. Its feed business performed well in 4Q as feed margins were boosted by lower raw material costs. Broiler prices were still under pressure but as low DOC prices translated to lower costs, the broiler business broke even. Comfeed and other players have already cut capacity since late 2014. The Indonesian government has also announced cuts to the number of grandparent stock imports. All these will help to correct the DOC oversupply situation. We understand that DOC prices have since recovered back to breakeven levels (Rp4,000-4,5000). We remain hopeful that the industry will swing back to profitability in 2H15. (Read Report)

Read Related Reports
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- Phillip Securities Research

Source : CIMB Research


Posted on Sunday, March 1, 2015 | 1.3.15
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