Analysts from CGS-CIMB Research and DBS Group Research have advised investors to accumulate shares in Japfa after it divested its shares in Greenfields Dairy Singapore for a consideration of US$295 million ($393.9 million).
See: Japfa disposes 80% stake in Greenfields Dairy for $393.9 mil
The consideration comprises of a cash component of US$236 million and shares amounting to a 20% stake in Freshness Limited (the JVCo).
CGS-CIMB analyst Cezzane See has maintained her “add” call and target price of $1, as she views the deal as positive for Japfa and that the divested unit has not been a major contributor to Japfa’s net profit previously.
“We like this deal as it was performed at a favourable valuation; above even Japfa’s forward EV/EBITDA. Moreover, Japfa guided it intends to utilise US$150 million of cash proceeds for a special dividend of 10 cents per share, a significant positive,” she says in a Dec 7 report.
In addition, See likes that the 20% stake allows for Japfa to still benefit from any upside potential of the business, but frees its management’s time to focus on its core upstream businesses that have been performing well.
As the deal is expected to be completed in February 2021, See says she will refrain from making changes to her estimates till then.
“We have been positive on Japfa as it has diversified its business to pillars that can mitigate each other’s weaknesses,” she says.
DBS analysts Andy Sim and Alfie Yeo have also reiterated their “buy” call with a maintained target price of $1.03.
Like CGS’s See, Sim and Yeo view the deal as positive for Japfa, which came at a good price as well.
“We see this development as a positive catalyst to share price for the price valuation of Greenfield Dairy Singapore vis-à-vis its overall profit contribution to the Group,” they write in a Dec 7 report.
“Greenfield Dairy Singapore contributes about 4% EBITDA to the Group in FY2019 and we project similar contributions in FY2020F. This pales in contribution to the realised value at US$295 million (for 100%) which accounts for about 24% of the Group’s current market capitalisation,” they add.
The deal, according to Sim and Yeo, should also provide a catalyst to drive Japfa’s share price up.
“We believe this is a positive testament to the Board and management of Japfa in its value creation and realisation. It had just completed the divestment of a 25% stake in its China Dairy business in Meiji earlier in July,” they say.
“Based on the announcement earlier in September on its evaluation, the proposed transaction is faster than envisaged. Following this 80% divestment in Greenfield Dairy Singapore, it continues to show that the group can generate value for shareholders,” they add.
Like See, Sim and Yeo are also maintaining their forecasts for now “given the relatively small contribution of Greenfield Dairy Singapore to the Group’s profits at just 4%”.
“At the current juncture, our sum-of-parts target price is S$1.03 which still offers a good c.28% potential upside, even without factoring in this transaction. We have valued its Dairy business (75% stake in China Dairy and 100% stake in GDS) at US$789 million (8x EV/EBITDA – FY20/21F). Assuming an uplift of US$200 million from this divestment gain, it should add 13 cents per share to our target price based on our back-of-envelope calculation,” they add.
As at 10.36am, shares in Japfa are trading 0.5 cent higher or 0.6% up at 83 cents.
