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CGS-CIMB lowers Japfa's TP to 42 cents after AAG listing

Felicia Tan
·2-min read

The new target price is based on an FY2024 P/E of 8x, which is based on Japfa’s remaining animal protein businesses.

CGS-CIMB Research analyst Tay Wee Kuang is keeping his “add” call on Japfa but with a lowered target price of 42 cents from 65 cents previously.

The new target price is based on an FY2024 P/E of 8x, which is based on Japfa’s remaining animal protein businesses. This is after removing Japfa’s stake in AustAsia Group (AAG) from FY2023.

Japfa’s subsidiary, AAG, was listed on the Hong Kong Exchange (HKEX) on Dec 30, 2022, at HK$6.40 ($1.11) per share.

With the listing of AAG, eligible Japfa shareholders will need to choose from four options with regard to the AAG shares that they are entitled to.

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To Tay, the poor market sentiments have less to a less-than-ideal initial public offering (IPO) valuation of HK$4.48 billion for AAG despite its growing milking capacity. This is compared to the price tag of HK$9.12 billion in 2021 when AAG welcomed new strategic shareholders, New Hope, Genki Forest and Honest Dairy.

“Given the growth prospects of China’s dairy industry, we believe that opting for Options 1, 2 or 3 may allow shareholders to benefit over the longer term. However, the default option (Option 4) is convenient for shareholders entitled to less than the lot size of 1,000 AAG shares to dispose of odd lots, or for investors who do not wish to have exposure to AAG’s business,” says Tay in his Jan 4 report.

“Nevertheless, investors should also consider that it may take till April 19 (i.e. 90 days after the end of the election period) to receive sales proceeds from the disposal of AAG shares by Japfa on behalf of investors, whereas those who choose Option 1 or 2 could have their AAG shares credited to a Hong Kong brokerage or nominee/counterpart by Jan 30, based on the indicative timelines provided by Japfa,” he adds.

To this end, the analyst notes that Japfa’s share price of 31.5 cents as at Jan 3 implies a 16% discount to its 55% stake in Japfa Comfeed.

“[This is] while disregarding the value behind its animal protein other (APO) business, although we understand that persistent losses in its APO business due to the persistent recurrence of African Swine Fever (ASF) have weighed on Japfa’s valuations,” Tay writes.

“As a result, we expect the unpredictability of ASF to drag on Japfa’s consolidated earnings,” he adds.

To the analyst, the subsiding of the ASF and easing cost pressures are re-rating catalysts for Japfa while weaker average selling prices (ASPs) resulting in a compression of margins are downside risks.

As at 12.54pm, shares in Japfa are trading 2 cents higher or 6.35% up at 33.5 cents.

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