For years, Japfa has been building up its business of rearing chickens, pigs and cows on an industrial scale. Despite its position as a leading player in this field, meeting a basic yet growing demand from consumers for more protein in their diet, investors’ appetite for its shares have not quite picked up in a big way.
On March 29, the company announced plans to spin off its dairy operations in China for its own listing in Hong Kong. If the listing of AustAsia Investment Holdings (AIH) goes ahead, Japfa shareholders will get to enjoy a distribution in specie of AIH shares, which can potentially result in Japfa shareholders holding shares worth more than what they are trading at now.
According to Japfa, based on sale of minority stakes in AIH to other parties last year, AIH is valued at US$1.17 billion ($1.59 billion). This means Japfa’s 62.5% share in AIH is worth some $992 million, or 49 cents per share. Meanwhile, Japfa’s stake in its Jakarta-listed subsidiary, PT Japfa Tbk, is similarly valued at 49 cents per Japfa share, using the Indonesia-listed entity’s current market value as a gauge.
Assuming completion of AIH’s listing, two distinct companies will ensue. First, there is AIH, which taps into the high-growth dairy sector in China with its focus on dairy farming and raw milk production. Next, will be what’s left of Japfa, which includes its chicken and pig farming operations, mainly in Indonesia and Vietnam, and to a smaller extent, India, Myanmar and Bangladesh.
With its own listing, AIH will have another avenue to access capital to further grow its dairy business in China. Japfa, on the other hand, can better focus its financial resources on growing the remaining businesses. Executive director and CEO Tan Yong Nang calls the exercise a “watershed” moment for Japfa.
There are reasons for other investors to share Japfa’s optimism that the spin-off of AIH will be well-received. In China, raw milk prices have been strong since 2020 and remain strong, due to a shortage of raw milk supply in the market, says Tan. And after a short-term drop in dairy demand in China due to the pandemic, the company’s dairy business is seeing a recovery in the demand for raw milk and the company believes that there should not be a major impact on this segment from Covid-19 over the medium to long term.
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Milking valuations
After the spinoff was announced, Japfa shares shot up from 65 cents to as high as 72 cents. However, the share price has since dropped to close at 69 cents on April 5, valuing the company at $1.4 billion.
In his March 31 report, CGS-CIMB analyst Tay Wee Kuang estimates that the US$1.17 billion valuation of AIH translates into a forward EV/Ebitda and P/E ratio of 11.6x and 13.1x for this entity. In contrast, peers in China dairy farming sector fetch corresponding valuations of 4.7x and 5.3x respectively.
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“We believe the premium is a result of several factors, including best-in-class milk yields among industry players as well as an increasing portion of downstream businesses for AIH, which could suggest a shift in valuations closer to downstream players moving forward,” writes Tay.
“Furthermore, the persistent demand-supply gap continues to support buoyant raw milk prices that are able to offset rising feed costs, with increasingly limited land suitable for cattle farming,” Tay adds. He has upgraded his call on Japfa to “buy” from “hold” along with raising the target price to 81 cents, from 65 cents previously.
While Tay of CGS-CIMB is upbeat on the spin-off listing, he is cautious that the company’s remaining animal protein business will not fetch a similar valuation as the dairy business. “We remain on the look-out for the indicative new share issuance from AIH’s listing that could dilute existing JAP shareholders’ stake in AIH,” he adds.
Meanwhile, other analysts have warned that another African Swine Flu (ASF) outbreak might occur in Vietnam, thereby affecting Japfa’s pig farming operations there again.
On this, Japfa’s CEO Tan believes the company is well-prepared. Biosecurity, according to him, is at the forefront of the company’s business. He admits that ASF has been an issue for the company and hardly anything can be done as there is currently no vaccine for this deadly virus. This is indeed an industry-wide problem that is tough to resolve and requires intervention from not just the whole industry but also the government, to eradicate. However, the company is not all that concerned.
“We believe that we are affected much less compared to the smaller players. This is because of our core competency of focusing on biosecurity, which then reduces the chances of being hit by the disease,” he claims. “We also have the advantage of economies of scale. We don’t put all of our eggs in one basket. We have many farms in different locations, and geographical diversification is key to disease control and minimising the spread of the disease,” adds Tan.
Feeding shareholders
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For its most recent FY2021 ended December 2021, Japfa recorded a 20% increase in revenue to US$4.6 billion, over the preceding year’s US$3.7 billion. However, earnings for the year dropped by 63% y-o-y to US$118.8 million from US$322 million a year ago, as costs and expenses were higher, while margins were lower, during this period.
Japfa attributes the better topline to growth in its main markets of Indonesia, Vietnam, China, India and Bangladesh. However, this was partially offset by a decline in revenue contribution from smaller markets such as Myanmar, where consumer demand was affected by both Covid-19 and political situation in the country.
In its earnings commentary, Japfa warns that operations in Myanmar remain uncertain and challenging and that the company is still incurring losses, although the red ink is not deemed “material”, given how revenue from Myanmar accounts for just 2% of the company’s total.
“Should the situation worsen, some level of accounting impairment on the fixed assets in Myanmar may be necessary in the future,” the company notes.
Nevertheless, as the key business activity in Myanmar is to supply chickens, which is deemed a staple and an affordable protein, Japfa does not expect the negative impact to be “long-lasting”.
Tan acknowledges that overall, FY2021 was a tough year for the company and that the lower earnings versus FY2020 were not unexpected. In fact, he believes that given the strong headwinds and squeezed margins, the company has held up quite well. He suggests that some of the analysts covering the stock had placed too much “hope and confidence” in the company, as the resultant FY2021 was below many of their expectations.
“The current Eastern Europe situation can change very quickly and that could have implications for us, possibly impacting our cost. But on the bright side, the Covid-19 situation seems to be getting better and at least we are able to remove one major negative,” says Tan.
Breeding for the future
Beyond its existing product range, Japfa is mulling expanding into aquaculture, which will help the company further diversify both revenue streams and markets, says Tan.
But for now, Tan says that the company has its hands full with its current Asian markets, which he believes has still much to improve and grow. Hence, there are no immediate or concrete plans to expand beyond the current markets, unless an attractive opportunity arises.
For now, Tan has what he calls Japfa’s three pillars — chicken, pigs and milk — to be the stable base from which the company can grow. “Within these three pillars, all [the businesses] still have a long way to go and a lot of scope to grow. One of the main reasons why our business is in this part of the world is that geographically, our markets have a about four billion people and that is a lot of people to feed,” says Tan, adding that in most of the countries, such as Indonesia, Vietnam and China, he notices a fairly low per capita consumption of protein.
“These markets are all still on a very high-growth trajectory because as people become wealthier in these developing economies, their consumption of protein goes up faster. So, we are quite lucky that we are in that space. I think there are a lot of opportunities for us in these markets,” says Tan.
Photo: The Edge Singapore/ Samuel Isaac Chua
