Japfa closed on 9 Jun 2017, Friday, at $0.56. I invested in this stock with my purchase prices in the range between $0.54 and $0.56. I have used slightly more technical analysis than fundamental analysis for this wager.
Japfa’s business is more cyclical in nature and I believe the worst has been over from technical consideration and for its actual business.
(1) About Japfa
Japfa Ltd is a Singapore-based agri-food company. The Company's principal activities are those of investment holding and provision of management services. The Company's segments include animal protein, dairy, consumer food and others.
The animal protein segment includes production of various animal proteins, including poultry, swine, beef and aquaculture, as well as animal feed, across the Company's focus markets, including Animal Protein Indonesia, which refers to the animal protein operations of its subsidiary, PT Japfa Comfeed Indonesia Tbk, and Animal Protein Other, which refers to the animal protein operations in Vietnam, India, Myanmar and China. The dairy segment includes production of raw milk in China and Indonesia and downstream milk products, such as fresh milk and cheeses to consumers in Indonesia and other countries in Asia. The consumer food segment uses the animal protein products that are produced in-house as raw materials for downstream consumer food segment.
(2) The problems facing Japfa
Earnings per share in 2015:
1Q2015: 0.4 US cents
2Q2015: 0.17 US cents
3Q2015: 0.45 US cents
4Q2015: 2.65 US cents
Earnings per share in 2016:
1Q2016: 1.33 US cents
2Q2016: 2.53 US cents
3Q2016: 2.72 US cents
4Q2016: 0.15 US cents (EPS dropped drastically. The share price plunged after the 1 Mar 2017 report)
Earnings per share in 2017:
1Q2017: 0.12 US cents (The share price kept plunging after the 27 April 2017 report)
Japfa’s 1Q2017 net profit declined by 37% year on year. The Group’s profitability was mainly impacted by the significantly lower selling prices for swine in Vietnam which started declining in the fourth quarter of 2016 due to China’s import restrictions. In addition, Indonesia witnessed weaker broiler (a young chicken suitable for roasting, grilling, or barbecuing) selling prices in 1Q2017 due to a lower-than-expected poultry demand.
But contrarians like me will like glitches like this as we know the over-correction has presented a golden opportunity for us to take advantage of. The worst could have been over as Japfa’s performance is basically cyclical. Also, Japfa’s diversified and vertically integrated business model, along with strong fundamentals should enable it to weather industry cyclicality and anchor the Group for long-term growth.
(3) Company thinks that the precipitous drop was overdone and has instituted many buybacks
Share buybacks done since Mar 2017:
17-May 300,000 shares @ $0.546 apiece
15-May 250,000 shares @ $0.528 apiece
8-May 1,339,200 shares @ $0.591 apiece
5-May 1,050,000 shares @ $0.598 apiece
4-May 600,000 shares @ $0.606 apiece
3-May 995,900 shares @ $0.591 apiece
2-May 1,700,000 shares @ $0.591 apiece
28-Apr 2,590,000 shares @ $0.605 apiece (Note: 1Q2017 poor results released on 27 April 2017)
17-Mar 171,000 shares @ $0.802 apiece
15-Mar 697,300 shares @ $0.787 apiece (Note: Bought after the poor 4Q2016 results when FY2016 report was released on 1 Mar 2017. This showed the management was very confident of the recovery of its business.)
Total: 9,693,400 shares @ $0.613 apiece worth $5,944,635.5
(4) The major shareholder bought the shares too
Exec Deputy Chairman Handojo Santosa @ Kang Kiem Han, who had 64.24% of shareholding in Japfa as of 8 Mar 2017, displayed his confidence on Japfa with the following purchases:
3-Jan 55,800 shares @ $0.90 apiece
27-Dec 50,000 shares @ $0.90 apiece
23-Dec 589,800 shares @$0.898 apiece
His total purchase since Dec 16 is 695,600 shares worth $624,800.6.
(5) Company is fundamentally sound
Even with the poor 4Q2016 and 1Q2017 results, its p/e (ttm) is at a very low 7.327x calculated based on its current price of 56 cents and US$ 1 =S$ 1.3864 . P/b is also low at 1.13x. Yield is an acceptable 1.79%. EBITDA / interest expense = 6.485x, and about 17.1% of its current market capitalization is in cash. A very healthy financials against whatever yardstick you appraise it!
Commenting on the Group’s operating landscape, Mr Tan Yong Nang, CEO of Japfa, said, “Industry cyclicality is part and parcel of an agri-food business. While we cannot direct macroeconomic factors, we can zero in on factors which we can control, including our production costs and yields. A key focus is to continually improve our operational efficiency so as to be one of the most competitive and efficient protein producers in the markets that we operate in.”
“While industry cyclicality is expected in an agri-business, what is more important is that our fundamentals remain intact, and the strength of our business model will help us navigate through market cycles. Our diversified businesses across five proteins and five countries will also position us for long-term growth as we continue to ride the growing animal protein consumption in emerging markets. We will stay the course in our strategy to be one of the most efficient and lowest cost industrialised producers in the markets we operate in, by building on our core competencies and strengthening our core pillars,” added Mr Tan.
(6) The share price has hit the floor technically
Share prices of Japfa plunged amid more uncertainty news and it has reached a point that punters and investors alike have either forgotten or so despondent to think that the worst has likely been over.
The Ramadan now in Indonesia can help the company in the sales of its broilers and China may import swine from Vietnam again. I also believe that Japfa is working hard to find other countries to export their broilers and pork.
This is a clear-cut case of Mr Market’s over-punishment on Japfa’s prices and it should not take long for Japfa’s intrinsic value to be more accurately reflected. Technically, I believe the share price has hit the trough and found its strong support at around 54 cents. The bullish momentum divergence will propel its share price to move upward strongly before it hits its resistance at about 70 cents, giving contrarians and value investors a 25% return on investment, and within a short timeframe too. When the 2Q2017 report is out on 11 Aug 2017, Japfa’s price can hit easily more than 90 cents if the average sale prices of broiler and swine can be back to their reasonable and normal prices by then.