Japfa Ltd: On cusp of a sustained turnaround
- Reinstate with an upgrade to BUY with TP of SGD0.45, equivalent to 6.5x FY25F earnings
- Normalising supply dynamics in Indonesia and Vietnam should support broiler and DOC prices in both countries, and swine prices in Vietnam
- Turnaround in Vietnam’s exports should boost job creation and stabilise animal protein consumption
- Upcoming 2Q24 results is expected to confirm the turnaround, with profits to more than double from a low of USD28mn to USD68mn
Upcoming 2Q24 results could provide confidence. Based on market prices of broiler and swine prices in its key markets, we expect to see further affirmation of this turnaround from its upcoming 2Q24 earnings. We believe both main engines – Indonesia and Vietnam operations are starting to fire up. For Indonesia operations (Japfa Comfeed Tbk), we project its FY24F operating profit to grow ~1.5x to USD207mn, from the low of USD141mn in FY23. For Vietnam, we project its FY24F operating profit to turn around from a loss of USD27mn to USD43mn.
Market has yet to fully price in the turnaround for Japfa Ltd. While Japfa’s share price has performed relatively strongly YTD, up by over 30%, we believe the market has yet to fully price in the potential recovery of its Vietnam operations as well as share price appreciation in Japfa Comfeed Tbk. Based on last traded price of Japfa Comfeed Tbk at ~IDR1,700/share (~55.4% owned), the implied equity value of Japfa’s stake is USD690mn. This stands at ~ 50% premium to Japfa’s current market cap of USD 463mn. This suggests the market is not attributing any value to its operations outside of Indonesia, which is unwarranted.
What has happened since 2022?
Since the end of 2022, Japfa has completed a share distribution in specie of its China diary business, AustAsia Group, which was listed on the Hong Kong exchange. Post distribution, Japfa is now focused along the poultry, swine and aquaculture value chain in emerging Asian countries. Indonesia and Vietnam operations are the two key revenue generators.
In 2022 and 2023, its Indonesian operations, Japfa Comfeed, was impacted by the lingering effects of COVID-19 and lacklustre demand along with the surge in input costs. The company was unable to pass on the higher feed raw material costs to customers due to demand and supply imbalances in DOCs and broilers. This led to margin compression and a drop in profitability in FY22, which continued into FY23.
In Vietnam, Asian Swine Flu (ASF) impacted its Vietnam’s operations and has been ongoing to date. In 2023, the swine and poultry industries were hit by soft consumer demand as the macro economy in Vietnam turned sluggish on weak global demand for goods, causing prices for swine and poultry to be depressed while production costs increased on the back of high commodity prices.
Why we believe the industry is turning around in Indonesia and Vietnam?
Broiler and Day-old chicks (DOC) prices have remained firm post festive season on tighter supply. Our Indonesian analyst has recently upgraded his call on Japfa’s 55% owned subsidiary, Japfa Comfeed Indonesia Tbk. His on-the-ground checks indicated that the major poultry players are keeping supply in check with voluntary culling, and is confident that prices should stay at the current elevated levels. Prices of broiler and day-old chicks (DOC) remained firm at above IDR20,000/ kg and IDR6,000/ chick, respectively, compared to average of IDR19,400/kg and IDR4,500/chick in 2023.
Swine prices averaged >15% above 2023 average. Swine prices averaged ~VND60,000/ kg YTD in 2024 and reached a high of VND68,000/kg in June 2024. This compares against an average price of VND52,000/kg in 2023. We believe this price could be sustained with stablising consumer demand, with signs of export recovery in Vietnam. Our optimisim is reinforced by outlook/data of major global corporations which point to improvements. We believe this could be an early signal of a halt in job cuts and a potential return to job creation at the factories, which will support animal protein demand.
Electronics – Exports for electronics have recorded 12 consecutive months of y/y growth. We believe this is largely driven by a recovery in the global PC market, which has been growing y/y for 2 straight quarters. Recovery is expected to continue in the coming quarters with the launch of Artificial Intelligent (AI) focused PCs. Intel reaffirmed in its 1Q24 earnings that it could surpass its 2024 AI PC CPU shipment target.
Mobile devices – Exports for mobile devices have recorded 4 consecutive months of y/y growth since Mar-24. In its 1Q24 earnings, Samsung, one of the largest phone manufacturers and employers in Vietnam, signalled confidence in a turnaround in the smartphone market. It highlighted that its confidence lies in stabilising consumer sentiment with high likelihood of upcoming rate cuts, introduction of AI features and economic growth in emerging markets.
Textiles/Footwear – Exports for textile and footwear have seen relatively more muted growth. We believe this could be attributable to stretched consumers especially in the US, cutting down on clothing spend. Major players like Hennes & Mauritz (H&M) and Nike continue to struggle with sales growth.
Overall, we believe the growth in electronics and mobile devices, would more than offset continued weakness the in textile and footwear sectors. With continued export recovery, we expect improved demand for animal protein sales from 2H24 and support current swine prices.
What’s driving our positive earnings outlook?
Stable supply keeping DOC and broiler prices firm. For its Indonesian operations, we expect FY24F earnings to see a significant turnaround of 87% y-o-y in IDR terms due to steady poultry prices with stable supply dynamics and strong cost control measures. Broiler and DOC prices remained firm from Apr to May 2024, post Lebaran period, while input costs such as corn and soybean meal have softened.
Vietnam swine prices averaged around VND60,000/ kg YTD in 2024. On Vietnam, we expect to see a similar situation to Indonesia unfolding. We believe we could see a significant improvement in 2Q24 earnings and for profits to remain elevated for the remainder of the year with swine and poultry prices staying above the cost of production. Based on market sources, swine production costs are estimated to have retreated below VND50,000/ kg (~VND45,000/ kg) while swine fattening prices have averaged around VND60,000/kg YTD.
We also see similar corn and soybean meal price decline in Vietnam, which should translate to higher margins.
Overall, we believe operating margin for the Vietnam business could land at a reasonable 5% level (below 2019 pre-Covid and African Swine Flu (ASF) level of 7% to 8%) in FY24F and 6% in FY25F.
Valuation and forecasts - How we value the company?
We value the company using sum-of-the-parts (SOTP) methodology with separate parts: Animal Protein – Indonesia and Animal Protein – Others.
Animal Protein – Indonesia: We valued this business based on our team’s Japfa Comfeed Tbk target price of IDR1,800, which is pegged to its 5-year average PE ratio of 11x on FY25F earnings. Japfa has 55.4% stake in Japfa Comfeed, which translates to an equity value of USD726mn.
Animal Protein – Others: We valued this business segment using a conservative 5.3x EV/EBITDA, which is the bottom 10th percentile of the peer valuation on FY25F EBITDA (considering the smaller operating scale).
Stripping out net debt attributable to Japfa Ltd (excluding those related to Japfa Comfeed), and applying a 25% Holdco discount, we arrived at a final SOTP valuation of SGD0.45, which is equivalent to an attractive 6.5x FY25F earnings.
What could go wrong with our forecast?
There are three key risks to our thesis:
- Significant ramp up in supply –YTD Jun 2024, the industry in both Vietnam and Indonesia seemed to have remained cautious, keeping supply at a reasonable level, and supporting prices. However, if competitors become more aggressive in ramping up supply, current prices may not be sustained.
- Export recovery in Vietnam falters – We believe export recovery is critical in stabilising and growing consumer demand for animal protein. While data is pointing to the early stages of a turnaround, animal protein prices may not hold at the current level if the turnaround is not sustained.
- Worsening of ASF and/or severe avian flu outbreak - A further worsening of swine flu and/or severe avian flu outbreak could lead to higher production cost and lower than expected margin.
| FY Dec | 1Q2023 | 4Q2023 | 1Q2024 | % chg y/y | % chg q/q |
|---|---|---|---|---|---|
| Revenue | 1,017 | 1,136 | 1,134 | 11.6 | (0.1) |
| Cost of Goods Sold | (939) | (1,017) | (953) | 1.4 | (6.4) |
| Gross Profit | 77.4 | 119 | 182 | 134.9 | 53.4 |
| Other Oper. (Exp)/Inc | (106) | (105) | (105) | (0.8) | 0.0 |
| Operating Profit | (28.6) | 13.3 | 76.6 | (367.6) | 475.9 |
| Other Non Opg (Exp)/Inc | 0.00 | 0.00 | 0.00 | - | - |
| Associates & JV Inc | 0.35 | (1.58) | (0.05) | nm | (96.8) |
| Net Interest (Exp)/Inc | (25.9) | (25.3) | (21.6) | 16.4 | 14.4 |
| Exceptional Gain/(Loss) | (0.10) | (0.39) | (7.33) | nm | nm |
| Pre-tax Profit | (54.3) | (13.9) | 47.6 | nm | nm |
| Tax | 10.2 | (1.88) | (13.6) | nm | nm |
| Minority Interest | 7.60 | 3.83 | (21.3) | nm | nm |
| Net Profit | (36.4) | (12.0) | 12.7 | nm | nm |
| Net profit bef Except. | (36.3) | (11.6) | 20.1 | nm | nm |
| EBITDA | 2.27 | 44.0 | 107 | 4,601.9 | 142.3 |
| Margins | |||||
| Gross Margins (%) | 7.6 | 10.4 | 16.0 | ||
| Opg Profit Margins (%) | (2.8) | 1.2 | 6.8 | ||
| Net Profit Margins (%) | (3.6) | (1.1) | 1.1 |
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