Japfa Ltd. Singapore Company Guide

Transcription

1 Singapore Company Guide Version 8 Bloomberg: JAP SP Reuters: JAPF.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Oct 2016 BUY Last Traded Price ( 27 Oct 2016): S$0.81 (STI : 2,828.94) Price Target 12-mth: S$1.18 (47% upside) (Prev S$0.97) Potential Catalyst: Resilience despite typically weaker 4Q earnings Analyst Ben SANTOSO bensantoso@dbs.com What s New 3Q16 core earnings of US$42m was well ahead of our expectations Results were boosted by contribution from Japfa Comfeed (on gains from sale of Australian cattle, firm DOC/broiler ASP and stronger Rupiah) FY16F/17F earnings raised 40%/32%; TP lifted to S$1.18 BUY call reiterated for 47% upside Price Relative Forecasts and Valuation FY Dec (US$m) 2015A 2016F 2017F 2018F Revenue 2,787 3,189 3,415 3,597 EBITDA Pre-tax Profit Net Profit Net Pft (ex. BA gains) Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) (1.5) (2.1) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) (2) (2) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 1 S: 0 H: 0 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P. Firing on all cylinders Delivering growth. (JAP) s FY15-18F EBITDA CAGR of 19% justifies our implied 6.3x forward EV/EBITDA multiple. The stock trades at a significant discount to its Indonesian-listed subsidiary Japfa Comfeed Indonesia (JPFA) despite delivering decent earnings growth from China, Vietnam and Myanmar, where per capita demand for dairy, animal protein and branded consumer foods is still rising. Strong 3Q16 led to FY16F/17F earnings revisions of 40%/32%. Reported 3Q16 earnings came in at US$48.0m (6-fold increase y-o-y; +8% q-o-q). Excluding the impact of changes in fair value of biological assets and translation FX gains (losses), 3Q16 core earnings came in at US$42.0m (+51% y-o-y; -13% q-o-q) far ahead of our expectations on annualised basis given strong contribution from subsidiary Japfa Comfeed Indonesia (JPFA). Taking this into account, we raised our ASP assumptions for Indonesian Feed, day-old-chick (DOC), and live broilers, and adjusted margins in cattle feedlot and consumer food higher. Our forecast on Dairy, which delivered 44% y-o-y growth in EBIT (-25% q-o-q due to seasonality) was unchanged BUY rating reiterated for 47% upside. Based on our revised forecasts, JAP s EBITDA is projected to expand by 16% to US$464.8m next year (from US$399.8m this year) driven by continued growth in all segments. Over the next twelve months we expect resilient demand in Indonesian live broiler and DOCs, further improvements in Consumer Food products through new product launches, better productivity/raw milk price in Dairy segment, as well as lower borrowing costs as we impute refinancing through new bonds. We recommend investors to take advantage of the attractive valuations. Valuation: Our SOP-based TP (pegged to forward EV/EBITDA) is raised to S$1.18 following our earnings revisions. While JPFA remains the largest contributor, the group s Dairy and Animal Protein segments outside Indonesia are expected to deliver respectable double-digit growth annually. Key Risks to Our View: JAP s share price is driven by DOC, broiler and swine prices as well as China raw milk price movements and the USD/IDR exchange rate. A strong recovery in the group s ASP and/or Rupiah would boost JAP s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 1,421 / 1,021 Major Shareholders (%) Rangi Management Limited 52.6 Morze International Limited 16.0 Tasburgh Limited 7.2 Free Float (%) m Avg. Daily Val (US$m) 1.4 ICB Industry : Consumer Goods / Food Producers ed: JS / sa: DT, PY

2 WHAT S NEW Firing on all cylinders Highlights 3Q16 earnings well ahead of expectations Reported 3Q16 earnings came in at US$48.0m (up from US$44.6m in 2Q16 and US$8.0m in 3Q15). This brought 9M16 reported earnings to US$116m, representing 107% of our initial FY16F earnings. Excluding the impact of changes in fair value of biological assets and translation FX gains (losses) the group posted 3Q16 core earnings of US$42.0m (+51% y-o-y; -13% q-o-q) well ahead of our expectations on annualised basis. As in 2Q16, the strong performance was driven by higher EBITDA contribution from Japfa Comfeed Indonesia (JPFA) of US$94.7m (+44% y-o-y; +7% q-o-q). EBITDA contribution from Animal Protein outside Indonesia and Dairy continued to expand by a decent 38% and 45% y-o-y to US$13.5m and US$16.4m, respectively. For the quarter, contribution from Japfa Comfeed had included US$13m gain from sale of its cattle in Australia as the ranches were sold. Japfa Comfeed (JPFA) s contribution remained strong 3Q16 EBITDA contribution from JPFA was stronger than expected (i.e. post Lebaran) due to better DOC/live broiler prices as well as lower realised feed raw material costs than expected. These high prices (due to rebalanced supply/ demand) rather than volume bolstered profitability in both Feed and DOC segments. For this reason, we expect margins to ease next year. Decent growth in Animal Protein outside Indonesia Animal Protein outside Indonesia contributed 3Q16 EBITDA of US$13.5m (+38% y-o-y; -28% q-o-q). The group attributed the improved performance to 18%/29% y-o-y higher swine feed and swine fattening volumes as well as better swine fattening margins in Vietnam which contributed more than 80% of operating profit from this segment. Dairy milking yield continued to rise In 3Q16, raw milk production in China rose 19% y-o-y (+1% q-o-q) to 87.4m kg from 86.4m kg in 2Q16 and just 73.4m kg in 3Q15 backed by higher number of milkable cows. Daily milking yields seasonally eased to 35.3kg/day vs. 36.9kg/day in 2Q16 and 34.7kg/day in 3Q15. The Dairy segment s revenue inched up 3% y-o-y (+1% q-o-q) to US$66.8m as lower prices offset higher volume. 3Q16 Dairy EBITDA consequently declined 24% q-o-q (+45% y-o-y) to US$16.4m delivering EBITDA margin of 24.6% - down from 32.8% in 2Q16. The group expects raw milk prices to remain sluggish in the near term, mitigated by operational efficiency and better yields. Volume driven improvement in Consumer Food The Consumer Food segment s EBITDA contribution was exceptionally strong at US$4.9m (+172% y-o-y; +158% q-oq) primarily due to higher sales volumes. However, start-up losses in Vietnam continued to weigh on profit contribution from Indonesia. Lower net gearing ratio As at end-september 2016, the group had total borrowings of US$732m down from US$846m at end June This translated to net debt to total equity ratio of 43% (declining from 64% at end-june 2016). The lower net gearing ratio reflects debt repayments undertaken by JPFA following cash injection from recently completed placement to KKR. No additional USD bond repurchase was undertaken in 3Q16. JPFA has recently announced plans to issue re-tap bonds for maximum amount of Rp3tr of which Rp1tr we assumed would be launched by end of this year to repay Rp1.5tr IDR bonds due February/March Outlook FY16F/17F earnings raised by 40%/32% Adjusting for the strong JPFA results in 9M16, we made changes to JPFA s earnings, particularly in Feed, DOC and broiler ASP as well as Feed raw material costs: 1. We tweaked FY16F/17F DOC ASP to Rp4,900/Rp5,100 per chick from Rp4,700/Rp4,900 previously 2. We adjusted FY16F/17F broiler ASP to Rp17,200/Rp17,600 per kg live from Rp17,000/Rp17,500 previously 3. We adjusted poultry feed ASP to Rp6,300/Rp6,400 Rp6,100/Rp6,400 previously We adjusted USD/IDR rate next year (in favour of stronger Rupiah) and benchmarked corn/soybean meal prices based on our latest in-house forecasts Accounting for its 51% stake in JPFA, JAP s FY16F/17F earnings were revised by +40%/+32%. Likewise, FY16F/17F EBITDA were revised by +18%/+20%. In line with seasonal trend, we anticipate sequentially lower 4Q16 earnings contribution from JPFA, offset by higher China Dairy (on seasonal recovery in milk yields). Post revisions, JAP s interest coverage ratio is expected to average 4.9x this year up from 3.2x last year thanks to both reduced debt and better profitability. Valuation TP adjusted to 1.18; BUY rating reiterated Based on our revised forecasts, JAP s EBITDA is due to expand 16% next year driven by steady double-digit growth in Animal Protein outside Indonesia and Dairy EBITDA. We employed SOP valuation based on forward EV/EBITDA multiples on each segment. Based on our forecast revisions, our TP is lifted to S$1.18 mainly to account for higher contribution from JPFA and significantly lower net debt. We reiterate our BUY rating for 47% upside to our revised TP. We believe the stock is significantly undervalued relative its presence in Asia s largest population, relative to peers, and for its secular growth prospects. Page 2

3 Quarterly / Interim Income Statement (US$m) FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq Revenue Cost of Goods Sold (557) (591) (601) Gross Profit (1.8) Other Oper. (Exp)/Inc (72.5) (82.8) (81.9) 12.9 (1.1) Operating Profit (2.3) Other Non Opg (Exp)/Inc (21.2) (1.2) 5.95 nm nm Associates & JV Inc nm nm Net Interest (Exp)/Inc (17.2) (15.1) (13.9) Exceptional Gain/(Loss) (9.3) (10.8) 5.75 nm nm Pre-tax Profit Tax (7.7) (11.2) (24.2) Minority Interest (2.4) (25.0) (31.0) nm 24.2 Net Profit EBITDA (1.0) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBS Bank Quarterly EBITDA (US$m) EBITDA 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Japfa Comfeed q-o-q growth -49% 6% -40% 43% 127% -2% -33% 104% 7% y-o-y growth 226% -12% -53% 109% 93% 114% 206% 44% Animal Protein - others q-o-q growth 400% 13% -27% 24% -27% -12% 36% 61% -28% y-o-y growth 67% -4% 415% -25% -41% 8% 40% 38% Dairy q-o-q growth -53% -20% 49% -6% -27% 56% 3% 20% -24% y-o-y growth 39% -1% -47% -18% 60% 10% 41% 45% Consumer food q-o-q growth 138% -50% 5% 80% -50% -22% 50% -10% 158% y-o-y growth NM 11% 125% -53% -26% 5% -47% 172% Others (3.0) EBITDA q-o-q growth -37% 4% -18% 24% 44% 6% -19% 71% -1% y-o-y growth 106% 0% -33% 52% 56% 53% 112% 46% EBITDA margin 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Japfa Comfeed 5.8% 7.2% 4.4% 6.1% 14.3% 14.0% 9.1% 16.7% 17.8% Animal Protein - others 9.8% 10.5% 8.5% 10.2% 7.3% 6.1% 8.6% 13.4% 9.3% Dairy 22.8% 18.2% 27.2% 23.8% 17.5% 25.2% 26.0% 32.8% 24.6% Consumer food 6.5% 3.9% 4.7% 7.4% 3.7% 3.0% 4.6% 3.6% 9.4% Source: Company, DBS Bank Page 3

4 SOP Valuation CY17F Target Holdco CY17F CY17F CY17F Proport ion St ake Equit y EBITDA CY17F discount Net Net EV Net debt of net debt value (US$ m) EV/EBITDA EV/EBITDA (US$ m) (US$ m) (US$ m) Dairy % % 61.9% Animal Protein (JPFA) % 5.2 1, % % Animal Protein (ex JPFA) % % Consumer Foods % % 100.0% 51.2 Aggregat e value , % 1,499.8 (+) Cash (-) Borrowings Net debt Number of shares (m) 1,765 Equity value/share (US$) 0.85 Equit y value/share (S$) 1.18 FY17F earnings (US$ m) Implied FY17F PER based on TP 9.2 Implied FY17F EV/EBITDA based on TP 6.3 FY15-18F earnings CAGR 42% PEG 0.22 Source: DBS Bank estimates Page 4

5 CRITICAL DATA POINTS TO WATCH Raw & fresh milk output (k MT) Earnings Drivers: DOC capacity expansion in Indonesia. Hampered by oversupply in FY14-15, JAP s DOC production in Indonesia is expected to remain flat in FY16F as a result of the government-mandated cull of c.640k Parent Stock (JAP s estimated share of 3m culled between Oct15 and Dec15). Feedmill capacity expansion on hold in Indonesia. Capital expenditure in poultry feedmill capacity is likewise expected to remain on hold until capacity utilisation rates are in excess of 90%. However, we expect continued expansion in fish and shrimp feeds. Volatility of raw material costs (as well as changes in government regulations with regard to importation of raw materials) and exchange rates may adversely affect profitability, if JAP is unable to pass on the cost pressures. Expansion of Animal protein operations in Vietnam, India and Myanmar. The group is expanding its geographical operations in Vietnam for both poultry and swine segments; swine profitability in Vietnam should improve in FY16 on the back of improved genetics. The group s Myanmar operations expanded poultry operations into Mandalay in FY15, and we expect improved earnings following the purchase of the remaining 15% minority interest. JAP s operation in India is small, with some increase in feedmill capacity there. More dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The fifth farm of the first five-farm hub in Shandong province was completed in FY15. A second five-farm hub was initially planned for construction between FY14 and FY18 in Inner Mongolia. However, so far only Farm 6 has started milking at end of FY15 and full milking is expected by end of this year. We understand construction of Farm 7 has been delayed due to weaker-than-expected raw milk prices. JAP is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads (completed at end FY15). Expansion of beef cattle feedlot. Japfa has a beef cattle feedlot in Shandong province with production capacity of 10,000 heads per annum. The bull calves produced by Japfa s five dairy farms in Shandong will be the livestock input into the new beef cattle feedlot in China. In Indonesia, imports of cattle are subject to government approvals and regulations, including quotas. Further investment in high-growth Consumer Food brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats. Broiler sales (mn birds) Consumer foods volume (k MT) China raw milk price (CNY/kg) Average USD/IDR rate Source: Company, DBS Bank Page 5

6 Balance Sheet: JAP s net debt-to-total equity ratio came in at 43% as at end of September 2016 and is conservatively forecast to settle at 57% by end- FY16F. We expect the group to refinance the outstanding Rp1.5tr notes (due 2017) and repay the USD notes (due 2018) to reduce its USD debt exposure by issuing IDR bonds. Share Price Drivers: DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% of the market. Overinvestment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have an instant impact on JAP s profitability even with cuts in parent stock (PS) numbers. Hence, we believe resumption of nationwide PS culling would send a positive signal for further DOC price upside. Leverage & Asset Turnover (x) Capital Expenditure Rupiah movements. JAP s USD bonds have created translation FX losses in Japfa s subsidiary, JPFA, together with the Rupiah s depreciation YTD. Hence, Rupiah movements would impact reported earnings. Key Risks: Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status. ROE (%) Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected price growth Movements in raw material costs and currencies. JAP is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power led to delays in passing on raw material costs. Forward PE Band (x) Changes in regulations. Changes in government regulations/ licensing/price or volume controls may adversely affect JAP s profitability. Vulnerable to liquidity and credit risks Company Background (JAP) is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia, Vietnam, Myanmar, India and China. The group is the second largest poultry feed and DOC (day-old-chicks) breeder The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products. PB Band (x) Source: Company, DBS Bank Page 6

7 Key Assumptions FY Dec 2014A 2015A 2016F 2017F 2018F Raw & fresh milk output Broiler sales (mn birds) Consumer foods volume China raw milk price Average USD/IDR rate 11,879 13,392 13,190 13,608 14,325 Segmental Breakdown FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (US$m) Dairy Animal protein 2,513 2,361 2,674 2,816 2,965 Consumer foods Total 2,947 2,787 3,189 3,415 3,597 EBITDA (US$m) Dairy Animal protein Consumer foods Total EBITDA Margins (%) Dairy Animal protein Consumer foods Total Income Statement (US$m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,947 2,787 3,189 3,415 3,597 Cost of Goods Sold (2,441) (2,267) (2,525) (2,669) (2,804) Gross Profit Other Opng (Exp)/Inc (315) (304) (336) (356) (376) Operating Profit Other Non Opg (Exp)/Inc 1.62 (31.9) 15.9 (19.7) (14.8) Associates & JV Inc Net Interest (Exp)/Inc (79.2) (67.2) (66.8) (63.5) (58.9) Exceptional Gain/(Loss) (40.2) (5.6) Pre-tax Profit Tax (14.5) (20.2) (55.2) (61.3) (68.6) Minority Interest (28.0) (27.1) (69.5) (81.7) (114) Preference Dividend Net Profit Net Profit before Except Net Pft (ex. BA gains) EBITDA EBITDA (ex. BA gains) Growth Revenue Gth (%) 9.3 (5.4) EBITDA Gth (%) Opg Profit Gth (%) (5.1) Net Profit Gth (Pre-ex) (%) (1.5) (2.1) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBS Bank Page 7

8 Quarterly / Interim Income Statement (US$m) FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue Cost of Goods Sold (557) (559) (571) (591) (601) Gross Profit Other Oper. (Exp)/Inc (72.5) (77.5) (91.0) (82.8) (81.9) Operating Profit Other Non Opg (Exp)/Inc (21.2) (1.2) 5.95 Associates & JV Inc Net Interest (Exp)/Inc (17.2) (15.2) (15.4) (15.1) (13.9) Exceptional Gain/(Loss) (9.3) 13.8 (1.6) (10.8) 5.75 Pre-tax Profit Tax (7.7) (6.8) (10.9) (11.2) (24.2) Minority Interest (2.4) (28.2) (13.7) (25.0) (31.0) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (1.3) EBITDA Gth (%) (19.5) 72.9 (1.0) Opg Profit Gth (%) (26.8) 95.6 (2.3) Net Profit Gth (Pre-ex) (%) (15.6) 91.1 (24.2) (23.7) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (US$m) FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets ,019 Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 2,327 2,213 2,540 2,832 2,975 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity ,145 Minority Interests Total Cap. & Liab. 2,327 2,213 2,540 2,832 2,975 Non-Cash Wkg. Capital Net Cash/(Debt) (697) (693) (658) (667) (628) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Bank Page 8

9 Cash Flow Statement (US$m) FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit Dep. & Amort Tax Paid (37.8) (20.2) (55.2) (61.3) (68.6) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (88.4) 11.8 (195) (112) (94.5) Other Operating CF Net Operating CF Capital Exp.(net) (293) (182) (163) (241) (248) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (5.9) (3.6) (2.9) (2.9) (3.0) Net Investing CF (299) (186) (166) (244) (251) Div Paid (3.7) Chg in Gross Debt 68.1 (132) (147) Capital Issues Other Financing CF (27.3) (75.3) 79.7 (2.0) (1.9) Net Financing CF 235 (207) (149) Currency Adjustments Chg in Cash 61.6 (139) (108) Opg CFPS (S cts) Free CFPS (S cts) (13.2) 5.68 (3.3) (0.3) 3.46 Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Ben SANTOSO Page 9

10 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 28 Oct :00:58 Dissemination Date: 28 Oct :13:16 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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