“2017 saw a perfect storm with a weak poultry performance in Indonesia due to sluggish consumption and China’s ban on pork imports from Vietnam. The likelihood of multiple adverse factors across countries occurring simultaneously again seems remote,” says Cheong.
Cheong sees Japfa as a proxy to rising protein consumption from the growing global middle-class, as Japfa operates in some of the most populous emerging economies in Asia where meat consumption is still far below levels in developed markets and global averages.
In his view, the problem is that the market has yet to fully understand Japfa’s business model given its complexity with multiple proteins and countries, “thin” coverage as well as its short listing history.
“To better understand the business, we performed detailed studies on PT Japfa TBK, which contributes 69% of our 2018F profit forecast and has been listed on the IDX since 1989. Its financial performance for the past 15 years shows that the business is resilient,” says Cheong.
At the share price of 61 cents, Japfa is trading at 8.3 times FY18F P/E which represents a significant 39% discount to peers in the market, as well as a 17% discount to the group’s 52.4% owned subsidiary.
Cheong believes this valuation gap should narrow going forward, as concerns over the earnings drag from its other businesses eases as the group’s core profit grows back to 2015-16 levels after weak 2017 results.
“Japfa’s 52.4% stake in the IDX-listed PT Japfa TBK alone is equivalent to 93% market cap of Japfa. It implies that Japfa’s three other business segments, which could generate at least US$30m net profit per year for 2018-20, are trading at 1.9x 2018F P/E,” notes the analyst.
As at 2.36pm, shares in Japfa are trading 2.5 cents higher at 64 cents or 1.7 times FY18F book value.
