CGS-CIMB Research analyst Tay Wee Kuang is upbeat on Japfa following its announcement of the acquisition of two dairy farms located in Shandong, China for US$123.4 million ($166.10 million) on June 28.
Japfa’s 75%-owned subsidiary AusAsia Investment Holdings will acquire the entire issued capital for Falcon Dairy Holdings (Falcon) for US$123.4 million ($165.5 million). Falcon holds 100% interest in Pure Source Farm Company, which in turn owns the two dairy farms.
See also: Japfa acquires two dairy farms in China for US$123.4 mil
“We like Japfa’s acquisition of Falcon which could see expansion of its cattle capacity by 19%,” Tay says in a July 1 report. The acquisition could add up to 16,000 cattle to Japfa’s existing cattle capacity of 84,000 from its eight existing cattle farms across Shandong and Mongolia.
Tay highlights that the acquisition price of US$123.4m represents 1.88 times of the assets’ book value as of March 31 and is at a slight discount to the 2 times book value of AustAsia when Japfadivested a 25% stake in its China dairy business to Meiji Co in July 2020 for US$254 million.
“The valuation is also within the group’s capex expectation of US$90-95 million to build a dairy farm with 10,000 cattle capacity. The acquisition will be fully funded through a debt facility, which could bring Japfa's FY2021 net gearing to 0.44 times (from 0.37times); we expect the interest on debt to be similar to the existing debt profile, at c.8.3%,” he adds.
Japfa says the acquisition will enable quicker expansion of AustAsia’s production capacity, allowing it to take advantage of the “favourable raw milk price environment” given the current supply shortage in the Chinese market, a view which Tay supports. He points out that raw milk prices remain elevated at RMB4.26 (89 cents) per kg in June, compared to the 10-year average of RMB3.59 per kg.
“Although the industry has raced to increase capacity since 2020, we expect raw milk prices to remain elevated over the next two years, as it typically takes 3-5 years to bring new capacity online,” he adds.
However, he also points out that Japfa’s near-term earnings could take a hit as the new farms recorded net losses of US$4.6 million in 1Q2021. Nonetheless, Tay is sure that Japfa will be able to optimise operations at the farms and turns things around. “We are confident that Japfa will be able to turn the business around, given its history of operating profitable dairy farms within the same region. Furthermore, JAP has the best-in-class technologies to maximise yields at 40.9kg/cow/day,” he says.
He expects the new farms to break even by FY2022 ending December and contribute full-year earnings from FY2023.
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To that end, he has revised his earnings per share (EPS) forecasts for FY2021 downwards by 3.5% and upwards for FY2022 and FY2023 by 0.23% and 8.4% respectively.
He reiterates his “add” rating with an unchanged target price of $1.22. “Our target price remains pegged to 11.5 times FY2022 EPS; the stock continues to trade cheaply at close to -0.5 standard deviation of forward P/E,” he adds.
As at 1.41pm, shares in Japfa are trading up 2 cents or 2.44% higher at 84 cents.
Photo: Bloomberg
