Japfa started at Buy by UOB KayHian as ‘too cheap to ignore’

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UOB KayHian started Japfa at Buy with a S$0.90 target price, saying it’s an “arbitrage too cheap to ignore.”

“Japfa’s 52.4 percent stake in the IDX-listed PT Japfa TBK alone is equivalent to 93 percent market cap of Japfa,” UOB KayHian said in a note on Wednesday. “It implies that Japfa’s three other business segments, which could generate at least US$30 million net profit per year for 2018-20, are trading at 1.9 times 2018F price-to-earnings.”

It added that the stock was currently trading at 8.3 times 2018 price-to-earnings, a “significant” discount of 39 percent to its listed peers and a 17 percent discount to Japfa TBK.

“We believe the market has yet to fully understand and appreciate Japfa’s diversified business model due to several factors, such as complexity of the business, thin broker coverage, short listing history and short track record of earnings,” it added.

UOB KayHian said it expected that valuation gap would narrow, pointing to a bright outlook and prospects for a strong turnaround.

“Japfa’s integrated agri-food business model, backed by more than 40 years of track record, enables it to ride on rising protein consumption among Asia’s growing middle class,” it said.

The brokerage pointed to OECD data showing that the levels of meat consumption in emerging Asian economies, while rising fast, are still well below developed market levels and global averages. It noted Indonesia’s annual meat consumption in 2016 was around 11 kg per capita, compared with a global average of 34 kg.

It also pointed to a strong turnaround for the company after 2017’s “perfect storm” of weak poultry performance in Indonesia and China’s ban on pork imports from Vietnam.

“After a perfect storm in 2017 due to adverse regulations, Japfa is on a strong turnaround path and we expect 2018 net profit to increase by more than 500 percent year-on-year,” the brokerage said. The likelihood of multiple adverse factors across countries occurring simultaneously again seems remote.”

UOB KayHian said it viewed its 2018 forecast of US$101 million core net profit for 2018 was “conservative,” after the first half’s US$67 million and as it used a wide margin of error for any major swings in animal protein prices.

Shares of Japfa were up 1.56 percent at S$0.65 at 17:04 SGT.

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