• Japfa’s 3Q21 core net PATMI of US$4m (-93% y-o-y / -93% q-o-q) missed our estimates, with 9M21 core net profit forming 66% of our full-year forecast. The substantial decline was due to weaker performance from its Indonesia poultry and Vietnam operations as the countries went into lockdown to curb the COVID-19 spread.
• Japfa's China dairy segment continued to deliver stable performance.
• We cut our 2021 and 2022 earnings forecast for Japfa by 29% and 38% respectively, and reduce our SOTP-based target price by 22%. Maintain HOLD.

Japfa's 3Q21 Results Below Expectations

• Japfa (SGX:UD2)’s 3Q21 core net profit of US$3.6m (-93% y-o-y, -93% q-o-q) was below our estimates, with 9M21 core net profit forming 66% of our full-year forecast. The huge decline was due to weaker demand and ASPs for its Indonesia poultry and Vietnam swine segments as the countries went into lockdown to curb the COVID-19 spread.
• Earnings significantly reduced by weak performance of APO segment and Japfa TBK in the quarter. In Indonesia, the COVID-19 situation has worsened since Jun 21, causing lockdowns in Indonesia which led to closing of food stalls, restaurants and shopping malls. This resulted in a significant decline for poultry demand and subsequently prices of broiler, which fell below cost in 3Q21. Furthermore, high feed raw material prices and shipping cost tightened feed margins. Hence, Japfa TBK reported a core PATMI loss of US$4m.
• Losses from the Animal Protein Other (APO) segment was steeper at US$16m in 3Q21. The weak performance was due to the worst wave of COVID-19 infections experienced in Vietnam which led to a total lockdown in July/August. This caused a severe impact on demand for staple proteins, and led to a loss in its poultry operations in Vietnam and downward pressure on swine prices. In 9M21, the APO segment reported a loss of US$11.7m compared with US$64m a year ago.

China Dairy Segment a Bright Spot With Stable Earnings

• China’s Dairy business continued to last for another 2-3 years as more independent fairy farmers give up cow-raising.

Indonesia Poultry and Vietnam Swine Segments to Face Uncertainties Due to COVID-19

• In Indonesia, movement take some time for poultry and swine prices to recover.

Japfa - Earnings Revision & Recommendation

• We reduced our core PATMI valuation base to 2022. Suggested entry price: S$0.54.

• Share price catalysts:
  • Better-than-expected ASPs for Indonesia poultry, China dairy and Vietnam swine products.
  • Value-unlocking activity such as spinning off the dairy or APO segment(s).
  • Reversal of rupiah weakness.

Source: UOB Kay Hian Research - 1 Nov 2021