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Analysts: Japfa’s Turnaround To Reap Investors 58% Returns
Aspire, Hot Picks | 11 March 2015
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By: Raymond Leung
Articles (142) Profile

Japfa Ltd is a leading pan-Asian industrial agri-food company that has been around since 40 years ago. It is headquartered in Singapore with regional presence in Indonesia, China, Vietnam, India and Myanmar.

In its 3Q14, Japfa took a huge hit to its share price. The group managed to scrape through though as their results for 4Q14 fell within the lowered expectations that the street had. Overall, the results for FY14 remain weak, which is of no surprise.

Analysts' updates on Japfa as at 10/03/2015

FY14’s Results

Revenue for FY14 grew by 9.3 percent to US$2.9 billion from US$2.7 billion in 2013. Gross profit increased marginally by 1.4 percent from US$499.2 million to US$506.4 million. However, gross profit margins fell by 1.3 percentage points after it decreased from 18.5 percent to 17.2 percent.

Operating profit consequently fell by 5.1 percent to US$191.5 million from USD$201.8 million. All in all, PATMI attributable to shareholders slipped by 25.3 percent from FY13’s US$ 41.8 million to the current US$ 31.2 million.

PATMI slipped

FY14’s revenue grew because of broad-based growth in the Animal Protein segment and the Dairy segment. However, it was an overall slip in profits because gross profit margins fell as a result of margin compression in the Japfa Comfeed segment.

The slip in PATMI (Profit After Tax and Minority Interests) was mainly due to fair value loss in its biological assets. The main contributing factors were the dairy operations in China and swine operations in Vietnam – milk prices in China was dropping and there was a review in its swine breeding practices.

Japfa’s Efforts

In the past year, Japfa has been aggressively expanding geographically into other agri-food segments like dairy and swine in China and Vietnam respectively. This is part of the management’s effort to diversify the company’s business from the original comfeed in Indonesia.

Source: FY14 vs FY13 Revenue Composition, Japfa FY14 Presentation

Japfa’s decision to diversify its business was mainly due to the Comfeed segment performance dragging the company down. Evidently, animal protein and dairy segments made up for that gap. However, the dairy segment in China and swine operations were not as successful.

Source: FY14 vs FY13 Operating Profit, Japfa FY14 Presentation

 

Source: FY14 vs FY13 PATMI ex. Bio Assets, Japfa FY14 Presentation

Outlook For Japfa

Japfa will continue with its plan to increase production for its dairy segment in China despite the weak sentiments. The increase of production will hopefully offset the difference caused by the lower market price of milk.

Comfeed prices are recovering as seen in 4Q14 where the segment managed to break even with the losses in 3Q14. The recovery is largely attributed to Japfa and its peers cutting production to allow for price correction.

On the other hand, the broiler segment continues to face margin pressures as surplus in the market is not cleared. Fortunately, the segment is looking better now that Day Old Chicks (DOC) prices are lowered and reducing the cost of broilers. This has allowed prices for broilers to stabilise and break even.

However, the DOC segment remains weak because of the current surplus in the market. The Indonesian government has announced the cut of grandparent stock imports to stabilise the market for DOC. According to Japfa, prices for DOC have since recovered to healthy levels.

Analysts’ Thoughts

The street maintains their positive sentiments about Japfa as they believe the industry should recover in 2H15. Analysts from DBS Vickers Research reiterated their “Buy” call towards the counter with a target price of $0.76.

They believe that DOC should see a price recovery of 6.5 percent this year and the opening of another dairy farm in China will drive Japfa’s core earnings of FY15 up by 40 percent.

Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.

Japfa  0.520 -- --   
Business: Co is an agri food company that produces multiple types of protein foods. It is headquarterd in Singapore and has operations in China, India, Myanmar and Vietnam.

Insight: Feb-19, FY18 revenue rose 10.8% mainly driven by h... Read More


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