Singapore Company Guide Japfa Ltd

Transcription

1 Singapore Company Guide Version 11 Bloomberg: JAP SP Reuters: JAPF.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 21 Apr 2017 BUY Last Traded Price ( 20 Apr 2017): S$0.675 (STI : 3,137.88) Price Target 12-mth: S$1.00 (48% upside) (Prev S$1.25) Potential Catalyst: Recoveries in 2Q17/3Q17 earnings Where we differ: Higher FY17F/18F earnings Analyst Ben SANTOSO bensantoso@dbs.com What s New FY17F/18F earnings cut 22%/15% on lower expected contribution from subsidiary Japfa Comfeed Dairy contribution is trimmed on lower expected raw milk price in China Recent sell-down is excessive; DOC/broiler prices have recovered BUY rating maintained Price Relative Forecasts and Valuation FY Dec (US$m) 2016A 2017F 2018F 2019F Revenue 3,033 3,356 3,571 3,832 EBITDA Pre-tax Profit Net Profit Net Pft (ex. BA gains) Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 95.5 (15.0) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) 95 (15) 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 (%): (22) (15) (14) Consensus EPS (S cts): Other Broker Recs: B: 1 S: 1 H: 0 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P. Adjusting our valuation Oversold. Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia s fast-growing regions. In this report, we adjusted FY17F/18F earnings to impute lower expected contribution from subsidiary Japfa Comfeed Indonesia (JPFA) due to weaker-than-expected 1Q17 day-old-chick (DOC) and live broiler prices. Our BUY call is maintained, as we believe the recent sell-down had pushed the counter s price at a significant discount to its revised sum-ofparts valuation. FY17F/18F earnings trimmed by 22%/15%. In this report, we adjusted our forecasts to account for lower expected contribution from 51%-owned JPFA (mainly from breeding and commercial farm segments while feed contribution was raised slightly). Additionally, we trimmed raw milk prices in China slightly and assume negative swine breeding gross margin in Vietnam (swine feed remains profitable). Changes to our forecasts caused lower margins across the board this year; although these were partly offset by higher DOC and feed volumes in Indonesia vis-à-vis previous forecasts. Expect more interventions post Lebaran. Since initial government interventions were announced end of March 2017 to address the oversupply, both DOC and live broiler prices have recovered (according to Arboge.com) in the worst affected areas; while in others, prices have increased further (early part of Lebaran peak season). We expect the government to take further measures, including parent stock (PS) culling, to address seasonally lower demand after Lebaran. Valuation: Changes to our forecasts trimmed our SOP-based TP (pegged to FY17F EV/EBITDA) to S$1.00 from S$1.25 previously. Further upside is possible if government undertakes timely measures to tackle the oversupply. Key Risks to Our View: JAP s share price is driven by DOC, broiler and swine prices as well as China raw milk price movements and the USD/IDR exchange rate. A strong recovery in the group s ASP and/or Rupiah would boost JAP s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,769 Mkt. Cap (S$m/US$m) 1,194 / 854 Major Shareholders (%) Rangi Management Limited 52.5 Morze International Limited 16.0 Tasburgh Limited 7.2 Free Float (%) m Avg. Daily Val (US$m) 1.7 ICB Industry : Consumer Goods / Food Producers ed: TH / sa: AS, PY

2 WHAT S NEW Adjusting our valuation Highlights Japfa Comfeed's (JPFA) contribution to moderate We cut JPFA's FY17F/FY18F earnings by 29%/26%, driven by a moderation in feed, breeding and commercial farm margins. We imputed lower DOC ASP (-3% vs previous forecast) to reflect the lower realised ASP in the 1Q17 due to 8% DOC/live broiler oversupply (as summarised below). FY17F domestic corn costs were also revised 8% higher from previous forecast; as insufficient crop and import ban incentivise hoarding and drive prices higher. Tackling renewed oversupply in DOC/live broilers Between January and March 2017, live broiler and egg prices in Indonesia were on a decline; and had dropped to below cost of production in some areas, particularly in Java. We believe the problem stemmed from both higher supply and lower demand. On the supply side, we suspect integrators may have miscalculated their supply projections when grandparent stock (GPS) procurement was made two years earlier. On the demand-side, weaker purchasing power in the middle lower income brackets was noticed due to several reasons, namely slower growth in minimum wages, cost efficiencies, and to a certain extent, increased occurrences of failed crops due to natural disasters. As the oversupply is only c.8% (vs >20% in ); we believe this year s situation should remain manageable (assuming the regulations are implemented). We noticed that both broiler and DOC prices (as monitored in Arboge.com) have rebounded from mid-march 2017 lows. As we enter this year s seasonal peak of May-June 2017, demand may have already started to pick up as well. Government intervention: Production cut On 31 March 2017, the government was reported to have issued a decree to balance poultry supply and demand (i.e. live birds and eggs) through the following steps: 1. A nationwide reduction of broiler FS (final stock) DOC (day-old-chick) production by 5m chicks (i.e. c.8%) to 58m per week from 63m per week 2. A nationwide cull of 20% of male layer FS DOC production 3. A nationwide cull of female layer FS above 70 weeks (layer FS can be maintained up to 90 weeks) for layer farms with FS population of more than 100,000 birds. The proposed reduction of broiler FS DOC output will be done in hatcheries by culling the unhatched eggs or by giving them away as part of their Corporate Social Responsibility (CSR) programme. The culled layer FS, however, may not be released to the market in an effort to reduce live bird supply. Dairy: Adding volumes, limited downside on ASP This year, we expect the group s Dairy EBITDA to expand by 18% y-o-y to US$90.5m (reduced slightly from previous estimate of US$92.1m) as we took a more conservative view on FY17F raw milk prices in China (reduced to CNY3.80/kg from CNY3.90/kg previously). In Indonesia, the group s dairy farm in East Java is due to commence construction with most of land cut and fill being completed. The new farm is expected to be fully milking by the end of This farm will have a capacity of around 8,000-10,000 heads. Daily milking yield is guided to reach c litres per day. Animal Protein (other): Swine price risks According to the Livestock Department of Vietnam as quoted in thepigsite.com - in 2016 the medium-big sized pig farms had increased production by 23% from 2015 level. We believe the surge in production volume was partly due to higher exports to China via auxiliary gates. China does not officially include Vietnam in its allowed list for live pig imports; although we understand there have always been illegal trade between the two countries via land routes. Since 4Q16, China had closed this route; causing oversupply in Vietnam. According to thepigsite.com, live pig prices was at 34,500VND/kg (US$1.4) at end of March 2017 below average breakeven cost of c.39,000vnd/kg (US$1.7). In taking this into account, we also cut FY17F/18F swine breeding margins into slight negative. For JAP however, the group would still be able to offset this through decent contribution from swine feed sales. FY17F/18F earnings revised by -22%/-15% On expectations of lower contribution from JPFA, Dairy and Animal Protein outside Indonesia, JAP s FY17F/18F earnings were revised by -22%/-15%. Page 2

3 Having imputed our revisions, JAP s EBITDA (excluding biological asset gains/losses) is forecast to shrink 8.5% y-o-y this year following a 45% spike in We employed SOP valuation based on forward EV/EBITDA multiples on each segment. Changes to our forecasts caused a 11% cut in the counter s EV and raised the group s net debt by 33% mainly on the back of lower cash balance. This resulted in a net 19% cut in equity value to US$0.70/share. Our SOP-based TP (pegged to FY17F EV/EBITDA) is likewise trimmed to S$1.00/share. We reiterate our BUY rating for 48% 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 Net gearing expected to remain below 40% As at end-december 2016, the group had total borrowings of US$840m up from US$732m at end-september This translated to net debt-to-total equity ratio of 46%. By the end of this year, we forecast the group s net gearing ratio to drop below 40%; as we assume full repayment of the remaining US$197m bonds through proceeds from new US$150m bonds issuance and Rp1tr additional re-tap bonds issuance. Weak 1Q17 underlying PATMI expected JAP s 1Q17 underlying PATMI (excluding biological gains/losses) is expected to come in between US$11.0m (- 55% y-o-y; -29% q-o-q) and US$12.6m (-48% y-o-y; -19% q- o-q). The lower y-o-y comparison was mainly due to seasonally lower ASP offset by y-o-y higher expected volumes. SOP Valuation CY17F Target Holdco CY17F CY17F CY17F Proportion Stake Equity EBITDA CY17F discount Net Net EV Net debt of net debt value (US$ 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% 53.9 Aggregate value , % 1,227.5 (+) Cash (-) Borrowings Net debt Number of shares (m) 1,765 Equity value/share (US$) 0.70 Equity value/share (S$) 1.00 FY17F earnings (US$ m) Implied FY17F PER based on TP 10.5 Implied FY17F EV/EBITDA based on TP 6.5 Source: DBS Bank estimates Page 3

4 CRITICAL DATA POINTS TO WATCH Raw & fresh milk output (k MT) Earnings Drivers: DOC capacity expansion in Indonesia. Hampered by oversupply in FY14-15, JPFA s DOC production in Indonesia is expected to increase to c.640m chicks in FY17F after the governmentmandated cull of c.640,000 Parent Stock (JAP s estimated share of 3m culled between October and December 2015). 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 FY17 on the back of improved genetics. The group s Myanmar operations expanded poultry operations into Mandalay in FY16, 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 first five-farm hub is located in Shandong province (Farm 5 was completed in FY16) and the second fivefarm hub is located in Inner Mongolia. Farm 6 has been fully milking since end of FY16 and Farm 7 started milking at the end of FY16 and is expected to be fully milking at the end of FY17. JAP is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads (construction started at end- FY16, full milking due in FY18). 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 4

5 Balance Sheet: JAP s net debt-to-total equity ratio came in at 46% as at end of December 2016 and is forecast to settle at 41% by end of FY17F. We expect the group to refinance the USD notes (due 2018) with the new USD notes issued early this year and its second issuance of re-tap bond to reduce its USD debt exposure. 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. Rupiah movements. The group 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. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Key Risks: Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status. 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 (second largest), Vietnam, Myanmar, India and China. 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. Source: Company, DBS Bank PB Band (x) Page 5

6 Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Raw & fresh milk output Broiler sales (mn birds) Consumer foods volume China raw milk price Average USD/IDR rate 13,717 13,237 13,555 13,747 13,766 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (US$m) Dairy Animal protein 2,201 2,452 2,776 2,936 3,163 Consumer foods Total 2,787 3,033 3,356 3,571 3,832 EBITDA (US$m) Dairy Animal protein Consumer foods Total EBITDA Margins (%) Dairy Animal protein Consumer foods Total Income Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 2,787 3,033 3,356 3,571 3,832 Cost of Goods Sold (2,267) (2,368) (2,710) (2,812) (3,009) Gross Profit Other Opng (Exp)/Inc (304) (354) (345) (367) (392) Operating Profit Other Non Opg (Exp)/Inc (31.9) 18.4 (4.6) (1.4) (0.4) Associates & JV Inc Net Interest (Exp)/Inc (67.2) (56.5) (55.1) (50.8) (47.0) Exceptional Gain/(Loss) (5.6) (18.7) Pre-tax Profit Tax (20.2) (56.9) (53.1) (74.7) (84.4) Minority Interest (27.1) (78.9) (71.4) (91.8) (102) Preference Dividend Net Profit Net Profit before Except Net Pft (ex. BA gains) EBITDA EBITDA (ex. BA gains) Growth Revenue Gth (%) (5.4) EBITDA Gth (%) (8.5) Opg Profit Gth (%) (3.4) Net Profit Gth (Pre-ex) (%) (1.5) 95.5 (15.0) 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 6

7 Quarterly / Interim Income Statement (US$m) FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue Cost of Goods Sold (559) (571) (591) (601) (604) Gross Profit Other Oper. (Exp)/Inc (77.5) (91.0) (82.8) (81.9) (98.2) Operating Profit Other Non Opg (Exp)/Inc (1.2) Associates & JV Inc Net Interest (Exp)/Inc (15.2) (15.4) (15.1) (13.9) (12.0) Exceptional Gain/(Loss) 13.8 (1.6) (10.8) 5.75 (12.0) Pre-tax Profit Tax (6.8) (10.9) (11.2) (24.2) (10.7) Minority Interest (28.2) (13.7) (25.0) (31.0) (9.3) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (5.4) EBITDA Gth (%) 3.4 (19.5) 72.9 (1.0) (36.1) Opg Profit Gth (%) 14.3 (26.8) 95.6 (2.3) (59.2) Net Profit Gth (Pre-ex) (%) 91.1 (24.2) (23.7) (65.0) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets ,017 1,079 Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 2,213 2,525 2,655 2,874 3,067 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity ,057 1,237 Minority Interests Total Cap. & Liab. 2,213 2,525 2,655 2,874 3,067 Non-Cash Wkg. Capital Net Cash/(Debt) (693) (504) (631) (614) (581) 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 7

8 Cash Flow Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit Dep. & Amort Tax Paid (20.2) (56.9) (53.1) (74.7) (84.4) Assoc. & JV Inc/(loss) Chg in Wkg.Cap (202) (123) (133) Other Operating CF Net Operating CF Capital Exp.(net) (182) (231) (222) (242) (257) Other Invts.(net) 0.0 (9.6) (0.3) (0.3) (0.3) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (3.6) 65.7 (3.0) (3.1) (3.1) Net Investing CF (186) (175) (225) (245) (260) Div Paid 0.0 (6.5) (12.3) (12.1) (17.9) Chg in Gross Debt (132) (2.5) 4.45 (56.9) (113) Capital Issues Other Financing CF (75.3) Net Financing CF (207) 0.47 (6.0) (67.0) (129) Currency Adjustments Chg in Cash (139) 188 (122) (40.0) (80.2) Opg CFPS (S cts) Free CFPS (S cts) (9.0) Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Ben SANTOSO Page 8

9 DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. 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DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from, Japfa Comfeed Indonesia as of 31 Mar DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from Japfa Comfeed Indonesia as of 31 Mar DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Japfa Comfeed Indonesia in the past 12 months, as of 31 Mar DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. 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