Japfa Ltd - Normalising Growth


Better 3Q15 EBITDA expected
We believe the steep share price correction YTD has more than priced-in Day Old Chicks (DOC) oversupply in Indonesia and softer raw milk prices in China. We expect Japfa’s 3Q15 earnings to show a sequential improvement, given higher feed prices and relatively resilient broiler and DOC prices despite steeper translation FX losses from subsidiary Japfa Comfeed’s US$225m bonds. We expect 3Q15 EBITDA to come in between US$70.9-76.0m (+20-28% y-o-y) and earnings (ex. fair value changes in biological assets) of US$7.4-10.1m (16-38% lower y-o-y).

Weak purchasing power may linger in the short term
Continued weakness in the Rupiah would progressively raise Japfa’s feedstock costs, and at the same time lift cost of living for Indonesian consumers (implying weaker purchasing power). We expect the DOC oversupply situation to balance out and prices recover as government-mandated nationwide cull of 6m parent stock takes place (expected in 4Q15).

Long term growth potential remains intact
Japfa is forecast to book EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 15% between 2014 and 2017 – mainly driven by higher dairy volumes. Japfa intends to double dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. In the Animal Protein segment, we expect Japfa’s combined regional DOC output to expand less aggressively by 5% CAGR between 2014 and 2017, given DOC overcapacity and weak purchasing power in Indonesia. Demand will continue to be driven by rising per capita income.

Technical Analysis
Daily Chart
Valuation:
Our SOP-based TP is S$0.46. We expect reduced contribution from Japfa Comfeed given losses in poultry breeding operations and FX losses. Our BUY rating for the counter is maintained on 15% upside potential.

Key Risks to Our View:
Japfa’s share price is driven by DOC, broiler and China raw milk price movements and to a certain extent, by USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost Japfa’s share price higher than our fair value, and vice versa. (Read Report)

Read Related Report
1) Japfa Ltd - Growing Appetite for Animal Protein by Phillip Securities Research, published on 26 October 2015

Source : DBS Group Research

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