• Japfa's 1Q19 core net profit declined 33% y-o-y, missing expectations at 15% and 17% of our and consensus full-year estimates. The miss was mainly due to low broiler ASP in Indonesia due to a temporary supply-demand imbalance.
• The Vietnam swine business continued to report a healthy profit but dairy profit declined marginally.
• We slash our 2019 EPS by 28% to account for the weaker Indonesia business, and our target price by 26% to S$0.73.
• Maintain BUY.

JAPFA's 1Q19 RESULTS

Earnings miss due to weaker-than-expected Indonesia operations.

• JAPFA LTD. (SGX:UD2)'s 1Q19 core net profit of S$18.9m declined 33% y-o-y, coming in below expectations at 15% and 17% of our and consensus full-year estimates respectively. The weak results were due to low broiler ASP in Indonesia on a temporary supply-demand imbalance as weaker-than-expected poultry demand caused an oversupply.
• A delayed corn harvest in 4Q18 also drove up corn prices.

Expect better Indonesia operation in 2Q19 from regulated culling and Ramadhan demand.

• To stabilise broiler prices for the rest of the year, Indonesia’s Ministry of Agriculture has started to cull unhatched broiler day-old chick (DOC) eggs nationwide. In addition, the Ramadhan in Jun 19 is expected to drive demand for poultry.
• On the positive side, sales volume for poultry feed continued to increase at 7% y-o-y in 1Q19.

Stable Vietnam swine business but marginal decline in dairy profit.

• The Vietnam swine business continued to report healthy profit in 1Q19 (+11% q-o-q), the fourth consecutive quarter of profits. Management reiterated that the recent African swine fever (ASF) could lead to a write-off of US$11.5m of swine bio-assets in the worst-case scenario, where 25% of its swine livestock is culled but this is unlikely to lead to a net loss in its Vietnam swine business.
• The dairy segment's core profit declined 12% y-o-y due to higher feed cost on higher domestic corn prices and higher cost of imported alfalfa.

Stock Impact

Expect 2019 core net profit to decline yoy from an exceptionally good 2018.

• The Indonesian poultry segment could face some headwinds after an exceptionally strong 2018 on good poultry ASP. Although there could be potential uncertainties in swine ASPs as the first confirmed cases of ASF in Vietnam were reported in Feb 19, management believes this would not lead to a net loss in its Vietnam swine business.
• In addition, the disease outbreak could lead to a spike in swine prices and potential exit of hybrid and backyard farms which make up 65% of the industry, allowing Japfa to capitalise the shift in market share. Moreover, Japfa has put in place stringent bio-security measures to minimise such threats.

Earnings Revision / Risk

• We slash our 2019-20 net profit forecasts by 24-28% after reducing our net profit forecasts for the Indonesian poultry and dairy segments on lower-than-expected ASPs and operating margins.
• Risks include:
  1. unfavourable forex rates;
  2. demand-supply imbalance for key proteins;
  3. prices and availability of feed raw materials,
  4. competition; and
  5. animal disease outbreak.

Valuation / Recommendation

• Maintain BUY and SOTP-based target price of S$0.73, which implies 11.0x 2019F PE, and a 6% discount to peers’ average 2019F PE of 11.7x.

Share Price Catalyst

• Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine products.
• Reversal of rupiah weakness.

Source: UOB Kay Hian Research - 3 May 2019