CGS-CIMB Group Research analyst Tay Wee Kuang upgrades Japfa to an “add” rating with an increased target price from 65 cents to 81 cents.
This is in light of Japfa’s milk-producing business in China, AustAsia Investment Holdings (AIH), having applied for its listing in Hong Kong, which will result in two separately run entities with more flexibility and better focus to grow their respective businesses.
As part of the initial public offering (IPO), existing Japfa shareholders will receive a distribution of AIH shares in specie, potentially resulting in Japfa shareholders holding shares worth more than what Japfa shares are trading at now.
See: Japfa's China-focused milk business to split off for own listing in Hong Kong
“We believe that Japfa could crystalise AIH’s total equity valuation of about US$1.2 billion ($1.5 billion), which we derive from the sale of a 12.5% stake in AIH to private companies Genki Forest Technology Group Holdings, Honest Dairy Group, and GGG Holdings undertaken by Japfa in FY2021 (ended December 2021),” says Tay.
The valuation translates into a forward EV/EBITDA and P/E ratio of 11.6x and 13.1x respectively, a mark over its China dairy farming peers’ 4.7x and 5.3x respectively.
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The analyst believes that this premium is due to a number of factors; firstly, the quality of Japfa’s milk yields far exceeding that of other industry players; secondly, an increasing portion of downstream businesses for AIH, potentially suggesting a shift in valuations closer to downstream players in the future; and lastly, the persistent demand-supply gap that continues to support buoyant raw milk prices to offset rising feed costs, with increasingly limited land suitable for cattle farming.
Taking away the potential equity value of US$730 million, representing a 62.5% equity stake in AIH, that could be realised through the eventual IPO, the current share price then suggests a remaining equity value of about US$328.5 million. This remaining equity value also translates to an implied FY2023 EV/Ebitda and P/E ratio of 4.3x and 4.4x, respectively.
Tay sees these valuations as attractive, despite risks of short-term profitability being affected by margin pressures due to rising raw material prices.
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Previously, the analyst valued Japfa’s entire business at 7x FY2023 P/E (now 7.7x FY2023 P/E), as he believed that valuations were not as rich for the group’s animal protein business, as compared to its China dairy business. “We remain on the lookout for the indicative new share issuance from AIH’s listing that could dilute existing JAP shareholders’ stake in AIH,” adds Tay.
However, certain considerations regarding the wider poultry business that Japfa is involved in has risen as well. In light of Japfa tackling African Swine Flu (ASF) amidst the effects of the Covid-19 pandemic in 2021, their business in Vietnam and Myanmar remained affected, though Indonesia returned to the black in 4QFY2021.
Some downside risks include a possible delayed IPO timeline for AIH and extenuating business conditions persisting, in light of there being a recent history of ASF outbreak across crucial areas in Southeast Asia.
As at 2.48pm, shares in Japfa are trading at 1.5 cents lower or 2.08% down at 70 cents at a FY2022 P/B ratio of 0.73x and dividend yield of 2.8%.
