• Volumes across all business segments grew y-o-y and q-o-q, contributing to improved sales turnovers.
• Higher operating costs and normalised ASPs dampened profitability, but lower margins were within our expectations.
• We maintain our FY21F-FY23F forecasts and reiterate ADD rating on Japfa (SGX:UD2) with a lower target price based on 10x FY22F EPS.

APO Weighed Down by Myanmar Poultry

• Animal Poultry – Others (APO) saw weak contribution in 1H21. Despite strong revenue growth of 26.0% y-o-y to S$459.6m, operating profit fell 25.3% in the same period on the back of US$5.3m operating losses from the Myanmar poultry business. PAT fell disproportionately by 69.9% y-o-y to US$13.0m from US$43.1m due to forex losses of US$5.9m as a result of a depreciating Kyat.
• With extenuating business conditions in Myanmar, Japfa is actively introducing cost control measures.
• Lower swine fattening margins as swine prices fell in 2Q21 also contributed to the poorer operating results, but current swine prices are viewed as more sustainable. This bodes well for Japfa, which continues to ramp up swine fattening volumes to compensate for lower margins as the industry recovers from supply shortages in the aftermath of African Swine Fever (ASF).

Uncertainties Ahead for Indonesian Poultry

• The worsening COVID-19 situation in Indonesia has cast demand uncertainties in 2H21F post Lebaran festivities in 2Q21 with typically higher demand for poultry. Despite effective culling initiatives by the government to control supply and support prices, the segment’s operating margins fell from 13.5% in 1Q21 to 10.5% in 2Q21 due to rising feed prices (mainly corn and soy) and transportation costs.

China Dairy Remains a Bright Spot

• The supply-demand gap continues to support high raw farms from the acquisition of Falcon Dairy Holdings Limited (Falcon) are also expected to contribute positively from 2H22F.

Reiterate ADD on Japfa With Target Price at 10x FY22F EPS

• Japfa’s 1H21 core net profit of US$117.3m was in line at 55%/54% of our/consensus FY21F estimates. 2Q21 core net profit was 27% lower than first quarter’s on weaker margins. Nevertheless, we expect margin compression in FY21F-FY23F.

• Reiterate ADD rating on Japfa with a lower target price on unchanged forecasts with target price based on 10x FY22F earnings per share (EPS) forecast, slightly lower than its 5-year worsening margins.

Source: CGS-CIMB Research - 30 Jul 2021