Japfa - UOB Kay Hian 2022-11-02: 9M22 Results Below Expectations; Weakness Across All Sectors

Japfa - 9M22 Results Below Expectations; Weakness Across All Sectors

JAPFA LTD. (SGX:UD2) | SGinvestors.ioJAPFA LTD. (SGX:UD2)
  • Japfa’s 9M22 core PATMI of US$66m (-46% y-o-y) was below our expectations, forming 63% of our full-year forecast.
  • 3Q22 core PATMI of S$12m fell 58% q-o-q as high feed costs affected both the Indonesia poultry (-45% q-o-q) and China dairy segments (-24% q-o-q). Vietnam continued to incur losses of US$4m in 3Q22 as the resurgence of ASF weakened its swine business.
  • We cut our 2022 and 2023 EPS by 27% and 39% respectively. Our SOTP-based target price for Japfa is cut by 10% to S$0.57. Maintain HOLD.

Japfa's 9M22 results below expectations.

  • Japfa (SGX:UD2)’s 9M22 core PATMI of US$66m (-46% y-o-y) was below our expectations, forming 63% of our full-year forecast. Revenue rose 10.5% y-o-y to US$3.7b, mainly driven by higher sales volume across all segments. Core PATMI weakened as all segments saw higher feed raw material costs and the African Swine Fever (ASF) in Vietnam challenged operations and tightened profitability.
  • Japfa TBK’s core PATMI declined q-o-q, APO losses also increased. In 3Q22, Japfa TBK reported core PATMI of US$10m (-24% q-o-q, vs loss of US$4m in 3Q21). Although the ASPs for Indonesia’s poultry segment have increased, profitability still remains under pressure as high feed raw material costs resulted in increased production costs across the vertically integrated operations.
  • On the other hand, losses from the Animal Protein Other (APO) segment widened from a US$2m loss in 2Q22 to a US$4m loss in 3Q22 as the swine business remained weak due to a resurgence of ASF since 4Q21, with swine ASPs depressed by pre-emptive sales in the market.
  • Vietnam’s feed and poultry businesses were profitable but unable to cover the weaker performance from swine operations.
  • China dairy’s profitability affected by high feed costs. Japfa's dairy revenue from China rose 9% y-o-y for 9M22, driven by higher raw milk sales volumes and additional contribution from Farm 8 and the two recently-acquired farms in Shandong. However, core PATMI for the dairy segment fell 57% y-o-y to US$30m due to high feed costs, which resulted in increased production costs for both dairy and beef operations.

All of Japfa's segments to face uncertainties from higher costs of raw materials and volatile ASPs.

  • In Vietnam, swine prices in 2022 and 2021 were lower compared with 2020 when prices were exceptionally high due to the supply shortage caused by ASF.
  • In addition, disruptions in global logistics have translated into higher costs of raw materials since 2022, which has led to high feed raw costs and resulted in increased production costs that may not be quickly passed on to end-consumers.

Japfa – Earnings forecast revision & recommendation

  • We cut our 2022/23/24 gross margin estimates by 0.7%/1.4%/1.5% to 17.2%/17.3%/17.3% to account for the higher feed costs, especially for Japfa’s Vietnam swine and China dairy operations. Also, we now expect the Vietnam swine segment to incur core PATMI losses of around US$20m for 2023 and 2024, vs an expected breakeven previously.
  • On the other hand, we have reduced the core PATMI estimates of Japfa’s China dairy segment by around 40% for 2022-24 to US$46m-51m, after reducing our operating margin assumptions by 7ppt.
  • After the reduction in gross margins, our 2022/23/24 core PATMI forecast for Japfa is lowered by 27%/39%/39%. Maintain HOLD recommendation on Japfa with a 10% lower SOTP-based target price of S$0.57, which implies 10.3x 2023F P/E.
  • Catalysts to Japfa's Share Price include:
    • Better-than-expected ASPs for Indonesia poultry, China dairy and Vietnam swine products.
    • Successful value-unlocking activities such as spinning off the dairy or APO segment(s).
    • Strengthening of currencies in Indonesia, Vietnam and China.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-02

Previous report by UOB:
2022-08-01 Japfa - 1H22 Results In Line; Weakness From Vietnam & High Feed Costs.

Price targets by other brokers at Japfa Target Prices.
Listing of research reports at Japfa Analyst Reports.

Relevant links:
Japfa Share Price History,
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Japfa Dividends & Corporate Actions,
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