• Japfa (SGX:UD2) has entered into a partnership with Meiji Co Ltd and is selling a 25% stake in its dairy segment for a cash consideration of US$254.4m.
• We are positive on the deal as this would improve Japfa’s net gearing position, and also solidifies a long-term relationship with an end-customer.
• We believe interest savings could counterweigh potential MI leakage. Japfa expects the deal to be completed in Jul 2020. Reiterate ADD.

Entering Into a Strategic Partnership With Meiji Co Ltd

• Japfa announced that it has entered into a conditional Sale and Purchase Agreement (SPA) with Meiji Co., Ltd for the sale of a 25% stake in its subsidiary, AustAsia Investment Holdings Pte Ltd. (AIH), which operates Japfa’s dairy farming and beef feedlot operations in China.
• Japfa will also enter into a 5-year rolling contract (renewable annually) to supply raw milk to Meiji (Japfa guided that Meiji currently accounts for 5-10% of its raw milk sales).
• According to Japfa, the cash consideration of US$254.4m values its dairy segment at 2x NAV (based on 31 Dec 2019 book value of US$127m for AIH) and will see the company recognise a gain of US$37m.
• The transaction is subject to the satisfaction of conditions precedent and shareholders’ approval. Completion of the SPA is expected to take place in Jul 2020.

Positive on Strategic Partnership and Healthier Balance Sheet

• We like that this deal solidifies a long-term relationship for Japfa with an end-customer (Japfa hopes that Meiji’s sales volumes reach 15-20% of total raw milk sales over time).
• We also like that this deal helps pare down debt which stood at US$1.38bn as at end-Dec 2019 (net gearing 1.0x).
• We estimate that interest savings of S$14m could counterweigh estimated FY20F minority interests leakage of S$15m, leading to a largely neutral effect on core net profit. We await the completion of the deal to make changes to our forecasts.

Reiterate ADD

• We note that Vietnam swine prices remained high in 1Q20 at VND70-80/kg, while management guided that the dairy business is still doing well with minimal disruption over the past few months. This could mitigate any weakness in 1Q20 Indonesia poultry prices that seem to have fallen since 4Q19.
• We reiterate our ADD call. Our Target Price of S$0.95 is based on 12x CY21F P/E (close to Japfa’s 5-year average mean).
• Potential catalysts are better poultry and Vietnam swine operating metrics.
• Downside risks are the reverse, as well as higher corn prices.

Source: CGS-CIMB Research - 15 Apr 2020