Japfa

[cyclone]

Proposed Acquisition of PT Japfa Comfeed Indonesia Tbk Shares

PT Japfa Comfeed Indonesia Tbk ("PT Japfa") is a principal subsidiary of the Company listed on the Indonesian Stock Exchange and contributes 2/3 of the Group’s consolidated revenue.

As announced by PT Japfa, it had on 18 July 2016 obtained a two-year shareholders' mandate to issue up to 10% of its issued share capital by private placement at a minimum exercise price of RP935.60 being the then market price determined in accordance with applicable OJK (Indonesia Financial Services Authority) regulations.

Pursuant to that mandate, PT Japfa had on 4 August 2016 issued 750,000,000 A shares (approximately 6.6% of PT Japfa’s issued share capital on a fully diluted basis) at Rp935.60 per share to KKR Jade Investments Pte Ltd.

The mandate for the remaining unissued 316,052,291 series A shares will expire on 18 July 2018. Japfa Ltd announced that it will on or about 8 June 2018, subscribe for the said remaining 316,052,291 PT Japfa shares at the said regulatory minimum price of Rp 935.60 per share (approximately USD21 million). This will consolidate Japfa Ltd’s shareholding in PT Japfa from 51.1% to 52.4%.

More details in http://infopub.sgx.com/FileOpen/20180531...eID=508315

PT Japfa today closed at Rp1555.

[Kaimin]

Japfa's financial year 2018 PATMI without forex as risen +675% to US$121 million on the back of higher Indonesian poultry and Vietnamese pork ASPs. The predictions I made that ASPs would spring back in my original posts largely came true. ASPs seem to still be considerably below 2016 levels because volume across all segments has grown by about 20% in the last 2 years but PATMI is still 26 million below 2016's. Exactly what part of the upcycle we are in is difficult to say, but perhaps reflecting extraordinary foresight on Mr Market, Japfa's stock has dropped 5.6% since the AR was released. Right now there are no indications of a substantial fall in ASPs, but if history repeats itself, chicken prices will collapse in the next 2 years. Swine might take longer because of its longer life cycle. Going forward, we can expect the volume of sales to increase in line with the growth of Indonesia and Vietnam's economy in the 5%-7% range.

[karlmarx]

Japfa Group is a holding company which owns 52% of PT Japfa Comfeed (Comfeed), and 100% of its Animal Protein Others, Dairy, and Consumer Foods (APODC) segments. But because Comfeed is 100% consolidated into the results – except for profits and shareholder equity -- at the Group level, it is difficult to understand how these separate businesses are doing. 

Separating the results of Comfeed and APODC is possible because Comfeed – as a listed company on Indonesian Exchange – makes public its financial statements. To be able to separate Comfeed and APODC, the numbers from Comfeed – which are denominated in IDR -- were converted to USD, based on the year’s average IDR/USD rate. There might be some inaccuracies in using such a crude method, but it is less tedious and should not be too wide off the mark. APODC numbers were then derived by subtracting Japfa Group numbers from Comfeed numbers. Some data are incomplete as Comfeed has yet to disclose its FY18 cashflow numbers.

The results of APODC are not possible to separate as there are no disclosed financial statements (P&L, BS, CF) for Animal Protein Other, Dairy, or the Consumer Food segment. Though limited information on revenue, profit, and assets/liabilities are available in the segment reporting.

Separating the results of Comfeed and APODC provided some interesting findings.


1. Comfeed is doing most of the heavy lifting

APODC generates low ROA, is highly levered (loans to assets), and is largely cashflow negative. Businesses that are growing may sometimes be cashflow negative and levered. But the poor returns from the APODC segment makes large expansion and use of debt seem to be a poor idea. Its book value saw no meaningful growth. Its total net profit from FY11 to FY18 is US$145m.

APODC               ROA (%)              Leverage (%)                    FCF (mil USD)                   Equity (mil USD)
FY11:                   3.2                       52                                       -116                                   318
FY12:                   0.8                       95                                       -102                                   90
FY13:                   4.5                       120                                     -25                                     50
FY14:                   2.6                       74                                       -170                                   543
FY15:                   5.6                       69                                       10                                      589
FY16:                   3.2                       47                                       18                                      425
FY17:                   -2.2                      42                                       -51                                     333
FY18:                   1.6                       58                                       na                                      416
Average                2.4                       nm                                     -62                                      nm

Since Comfeed was already listed on IDX for a long time prior to Japfa’s listing on SGX in 2014, it can be argued that the purpose of Japfa’s listing was mainly to raise money for the APODC segment. But because APODC’s numbers were so bad, it is unlikely the market will be willing to give it a high valuation, or even be interested at all, if the controlling Santosa family wishes to sell some of its shares. So how do you get people to buy something that looks so bad? Fruit sellers and investment bankers alike will give you the same advice, “throw in some of the good stuff with the bad to make it all look better!”

Comfeed            ROA (%)              Leverage (%)                    FCF (mil USD)                   Equity (mil USD)
FY11:                   7.4                       42                                       -54                                     378
FY12:                   9.0                       29                                       -112                                   508
FY13:                   3.9                       23                                       -130                                   446
FY14:                   2.4                       19                                       -1                                       401
FY15:                   3.0                       15                                       57                                      419
FY16:                   11.2                     22                                       169                                    663
FY17:                   5.2                       28                                       -44                                     689
FY18:                   9.7                       29                                       na                                      714
Average                6.5                       nm                                     -16                                     nm

Comfeed generates a moderate return, uses less leverage, and is far less negative on its cash flow. Its book value almost doubled from FY11 to FY18. During the same period, Comfeed also paid about US$270m of dividends. So the shareholder returns, in USD terms, were more than double. Its total net profit is US$638m; about 4 times that of APODC. This means APODC contributed only a fifth to Japfa’s total profits from FY11 to FY18.
 

2. Japfa Group may have difficulties in increasing its dividend (payout ratio)

Since Japfa Group relies on Comfeed for profits and dividends, so long as APODC does not go into losses, Japfa Group should be able to pay out dividends received from Comfeed. But Japfa Group is unlikely to pass on all the economic benefits of the dividends it received from Comfeed, to its own shareholders. There are a few reasons for this.

The first is the issue of long-term appreciation of USD against IDR. The average USD/IDR in 2011 is 8,764. This rose to 14,304 in 2018. As Comfeed’s function currency is the IDR, this means that Comfeed will have to work harder just to contribute/pay the same level of profit/dividend to parent Japfa Group, if USD is to continue its appreciation against the IDR. How much harder did Comfeed had to work, from 2011 to 2018, just to contribute/pay the same level of profit/dividend to parent Japfa Group? Since the USD appreciated 63% against the IDR from 2011 to 2018, Comfeed had to increase its profit/dividend by 63% as well.

So while Comfeed’s business may be growing in IDR terms, the growth will be lower when viewed in USD terms. This is especially the case if Comfeed retains some of its IDR profits, to plough back as working capital. From FY11 to FY18, Comfeed’s profits totalled IDR 8,649 billion, but only paid out IDR 3,202 billion as dividends; a 37% payout ratio. Therefore as Comfeed’s book value in IDR grew by 208% -- from IDR 3,317 billion in FY11, to IDR 10,214 billion in FY18 -- its book value in USD grew by only 88%, from US$378m in FY11 to US$714m in FY18.

The second issue that shareholder of Japfa Group should be concerned with is that Japfa Group only owns 52% of Comfeed, which means only 52% of the dividends declared from the latter will flow to the former. 

Dividends from               Comfeed to Japfa            Japfa to shareholders    (in US$m)
FY14:                                 4.5                                      0                      (IPO year)
FY15:                                 0                                         6.4
FY16:                                 9                                         12.5
FY17:                                 20                                       6.5
FY18:                                 41                                       27.2
Total                                  74.5                                    43.1

Comfeed’s latest US41m dividend to Japfa is its second biggest ever. Its biggest dividend was in FY11 when it distributed US$50m to Japfa Group. Comfeed will have to maintain its earning power to be able to maintain and increase its dividends to Japfa Group. What were Comfeed’s historical earnings?

Comfeed Profit               (in US$m)           (in IDR billion)                  Average USD/IDR
FY11:                                 70                        617                                     8,764
FY12:                                 105                      991                                     9,359
FY13:                                 56                        595                                     10,488
FY14:                                 33                        391                                     11,848
FY15:                                 39                        524                                     13,385
FY16:                                 162                      2,171                                  13,323
FY17:                                 82                        1,107                                  13,364
FY18:                                 157                      2,253                                  14,304

Clearly, there has been good years and not so good years. This is likely to be the pattern in the future as well. Though if Comfeed’s stars are well-aligned, its profits might continue to be on an upward trend. So for Japfa Group shareholders, a dividend of US$27.5m may not materialise in the next or following year, if Comfeed’s profit dips in those years. 

The last issue that makes it difficult for Japfa to pay dividends is its huge debt burden. The APODC segments have a total of US$745m of bank loans, including US$252m of long-term loans at the Holding Company level. Given the poor ability of APODC to generate profits, the task of substantially paying down these US$745m loans is a tall order.

APODC                Profit                   Bank Loans        (in US$m)
FY11:                   9.0                       145
FY12:                   4.5                       506
FY13:                   24.6                     648
FY14:                   26.1                     738
FY15:                   52.6                     648
FY16:                   34.7                     512
FY17:                   -26.5                    490
FY18:                   20.7                     745

Unless the APODC segments materially improve their performance, or Japfa Group disposes some of these APODC segments, the large amount of loans by APODC is likely to impede any large distribution of dividends from Japfa Group.

While the performance of Japfa Group is tied to the selling prices of animal protein, the unfavourable long-term exchange rates and heavy bank loans will likely weigh on any upside gained from improved selling prices. 

Based on the points raised, perhaps shareholders of Japfa should sell Japfa and buy Comfeed instead. Though there is still the exposure to a possibly depreciating IDR.

[Kaimin]

Japfa Group is a holding company which owns 52% of PT Japfa Comfeed (Comfeed), and 100% of its Animal Protein Others, Dairy, and Consumer Foods (APODC) segments. But because Comfeed is 100% consolidated into the results – except for profits and shareholder equity -- at the Group level, it is difficult to understand how these separate businesses are doing. 

Separating the results of Comfeed and APODC is possible because Comfeed – as a listed company on Indonesian Exchange – makes public its financial statements. To be able to separate Comfeed and APODC, the numbers from Comfeed – which are denominated in IDR -- were converted to USD, based on the year’s average IDR/USD rate. There might be some inaccuracies in using such a crude method, but it is less tedious and should not be too wide off the mark. APODC numbers were then derived by subtracting Japfa Group numbers from Comfeed numbers. Some data are incomplete as Comfeed has yet to disclose its FY18 cashflow numbers.

The results of APODC are not possible to separate as there are no disclosed financial statements (P&L, BS, CF) for Animal Protein Other, Dairy, or the Consumer Food segment. Though limited information on revenue, profit, and assets/liabilities are available in the segment reporting.

Separating the results of Comfeed and APODC provided some interesting findings.


1. Comfeed is doing most of the heavy lifting

APODC generates low ROA, is highly levered (loans to assets), and is largely cashflow negative. Businesses that are growing may sometimes be cashflow negative and levered. But the poor returns from the APODC segment makes large expansion and use of debt seem to be a poor idea. Its book value saw no meaningful growth. Its total net profit from FY11 to FY18 is US$145m.

APODC               ROA (%)              Leverage (%)                    FCF (mil USD)                   Equity (mil USD)
FY11:                   3.2                       52                                       -116                                   318
FY12:                   0.8                       95                                       -102                                   90
FY13:                   4.5                       120                                     -25                                     50
FY14:                   2.6                       74                                       -170                                   543
FY15:                   5.6                       69                                       10                                      589
FY16:                   3.2                       47                                       18                                      425
FY17:                   -2.2                      42                                       -51                                     333
FY18:                   1.6                       58                                       na                                      416
Average                2.4                       nm                                     -62                                      nm

Since Comfeed was already listed on IDX for a long time prior to Japfa’s listing on SGX in 2014, it can be argued that the purpose of Japfa’s listing was mainly to raise money for the APODC segment. But because APODC’s numbers were so bad, it is unlikely the market will be willing to give it a high valuation, or even be interested at all, if the controlling Santosa family wishes to sell some of its shares. So how do you get people to buy something that looks so bad? Fruit sellers and investment bankers alike will give you the same advice, “throw in some of the good stuff with the bad to make it all look better!”

Comfeed            ROA (%)              Leverage (%)                    FCF (mil USD)                   Equity (mil USD)
FY11:                   7.4                       42                                       -54                                     378
FY12:                   9.0                       29                                       -112                                   508
FY13:                   3.9                       23                                       -130                                   446
FY14:                   2.4                       19                                       -1                                       401
FY15:                   3.0                       15                                       57                                      419
FY16:                   11.2                     22                                       169                                    663
FY17:                   5.2                       28                                       -44                                     689
FY18:                   9.7                       29                                       na                                      714
Average                6.5                       nm                                     -16                                     nm

Comfeed generates a moderate return, uses less leverage, and is far less negative on its cash flow. Its book value almost doubled from FY11 to FY18. During the same period, Comfeed also paid about US$270m of dividends. So the shareholder returns, in USD terms, were more than double. Its total net profit is US$638m; about 4 times that of APODC. This means APODC contributed only a fifth to Japfa’s total profits from FY11 to FY18.
 

2. Japfa Group may have difficulties in increasing its dividend (payout ratio)

Since Japfa Group relies on Comfeed for profits and dividends, so long as APODC does not go into losses, Japfa Group should be able to pay out dividends received from Comfeed. But Japfa Group is unlikely to pass on all the economic benefits of the dividends it received from Comfeed, to its own shareholders. There are a few reasons for this.

The first is the issue of long-term appreciation of USD against IDR. The average USD/IDR in 2011 is 8,764. This rose to 14,304 in 2018. As Comfeed’s function currency is the IDR, this means that Comfeed will have to work harder just to contribute/pay the same level of profit/dividend to parent Japfa Group, if USD is to continue its appreciation against the IDR. How much harder did Comfeed had to work, from 2011 to 2018, just to contribute/pay the same level of profit/dividend to parent Japfa Group? Since the USD appreciated 63% against the IDR from 2011 to 2018, Comfeed had to increase its profit/dividend by 63% as well.

So while Comfeed’s business may be growing in IDR terms, the growth will be lower when viewed in USD terms. This is especially the case if Comfeed retains some of its IDR profits, to plough back as working capital. From FY11 to FY18, Comfeed’s profits totalled IDR 8,649 billion, but only paid out IDR 3,202 billion as dividends; a 37% payout ratio. Therefore as Comfeed’s book value in IDR grew by 208% -- from IDR 3,317 billion in FY11, to IDR 10,214 billion in FY18 -- its book value in USD grew by only 88%, from US$378m in FY11 to US$714m in FY18.

The second issue that shareholder of Japfa Group should be concerned with is that Japfa Group only owns 52% of Comfeed, which means only 52% of the dividends declared from the latter will flow to the former. 

Dividends from               Comfeed to Japfa            Japfa to shareholders    (in US$m)
FY14:                                 4.5                                      0                      (IPO year)
FY15:                                 0                                         6.4
FY16:                                 9                                         12.5
FY17:                                 20                                       6.5
FY18:                                 41                                       27.2
Total                                  74.5                                    43.1

Comfeed’s latest US41m dividend to Japfa is its second biggest ever. Its biggest dividend was in FY11 when it distributed US$50m to Japfa Group. Comfeed will have to maintain its earning power to be able to maintain and increase its dividends to Japfa Group. What were Comfeed’s historical earnings?

Comfeed Profit               (in US$m)           (in IDR billion)                  Average USD/IDR
FY11:                                 70                        617                                     8,764
FY12:                                 105                      991                                     9,359
FY13:                                 56                        595                                     10,488
FY14:                                 33                        391                                     11,848
FY15:                                 39                        524                                     13,385
FY16:                                 162                      2,171                                  13,323
FY17:                                 82                        1,107                                  13,364
FY18:                                 157                      2,253                                  14,304

Clearly, there has been good years and not so good years. This is likely to be the pattern in the future as well. Though if Comfeed’s stars are well-aligned, its profits might continue to be on an upward trend. So for Japfa Group shareholders, a dividend of US$27.5m may not materialise in the next or following year, if Comfeed’s profit dips in those years. 

The last issue that makes it difficult for Japfa to pay dividends is its huge debt burden. The APODC segments have a total of US$745m of bank loans, including US$252m of long-term loans at the Holding Company level. Given the poor ability of APODC to generate profits, the task of substantially paying down these US$745m loans is a tall order.

APODC                Profit                   Bank Loans        (in US$m)
FY11:                   9.0                       145
FY12:                   4.5                       506
FY13:                   24.6                     648
FY14:                   26.1                     738t
FY15:                   52.6                     648
FY16:                   34.7                     512
FY17:                   -26.5                    490
FY18:                   20.7                     745

Unless the APODC segments materially improve their performance, or Japfa Group disposes some of these APODC segments, the large amount of loans by APODC is likely to impede any large distribution of dividends from Japfa Group.

While the performance of Japfa Group is tied to the selling prices of animal protein, the unfavourable long-term exchange rates and heavy bank loans will likely weigh on any upside gained from improved selling prices. 

Based on the points raised, perhaps shareholders of Japfa should sell Japfa and buy Comfeed instead. Though there is still the exposure to a possibly depreciating IDR.

Nice analysis of the numbers, but two factors make your suggestion inadvisable. The first is that right now, it's trading at 25 P/E on the Indo stock exchange.

The second is that its structure of Japfa. It is a holding company with all its subsidiaries structured as limited companies so it doesn't take on their liability. Japfa itself has 1.3B USD in assets, of which 1.27B USD is investments in subsidiaries. It has 288M USD in liabilities, of which 252M USD is a loan it took out to acquire its remaining stake in AustAsia (a dairy company and one of the more profitable segments of Japfa). I also think that APODC ought to be broken down to reveal that its overall bad results are the average of good and bad businesses. Dairy for example has been consistently profitable, contributing 22M in 2015 to 32M in 2017. APO is heavily cyclical but has recovered. One particularly bad spot is its Consumer foods business, which lost 16M this year and has never been profitable. Together their ROA looks much worse.

Curiously, Japfa's majority interest in Japfa Comfeed alone is worth, at the last listed price on the Indo stock exchange, 2.5B SGD. Japfa's 52.4% stake in Japfa Comfeed is worth just under hair of its own 1.3B SGD market cap. And as all its business is structured as subsidiaries including the APODC segments, Japfa is not liable for any of its debts. Whether Japfa will choose to inject money into these is a capital allocation issue to the management - they could let these fail. But by buying Japfa now, you're getting Comfeed plus its APODC for nearly free even if it is a bad business. APODC makes up about a third of profit as of the most recent results.

I can't comment much with regards to the IDR-USD exchange rate, I know little and don't try to anticipate these things.

[karlmarx]

I am indifferent to whether people buy/sell Japfa, or buy/sell Comfeed. Even if the idea of selling Japfa and buying Comfeed is a bad idea, this does not negate the point that Japfa does not appear to be a good investment candidate.

With regards to Japfa's valuation, certainly we can say that we are getting the APODC segments for free. But a free/discounted business that is net cash and consistently making good profits is not the same as one that is net debt and consistently in difficult situations and just getting by. If an investor is interested in Japfa for its free APODC segment, there are also other holding companies to consider, where their 'free' businesses are net cash and consistently profitable.

Although Japfa Group's subsidiaries may have ring-fenced their liabilities, this does not mean that there are no adverse consequences or losses for Japfa Group, if any of its subsidiaries defaulted on their loans. If one of Japfa's subsidiaries defaulted on their loans, it is very likely that the borrowing/purchasing cost for the rest of the related subsidiaries/companies will also increase. These subsidiaries are not mom-and-pop setups with $10k or $100k of equity. I am more circumspect about treating the debts of Japfa Group, and its subsidiaries, as minor issues.

[¯|_(ツ)_/¯]

Intra-Group transfer of PT So Good Food and PT SGF Manufacturing

The Company and its subsidiaries (“Group”) embarked on this strategy in 2019 when Japfa Comfeed Vietnam Co., Ltd acquired the Group’s Vietnamese consumer subsidiary. The 2019 acquisition brought together the Group’s Vietnamese downstream consumer business and its upstream and mid-stream poultry operations in Vietnam . Producing locally for consumption locally aligns the Group with the global trend towards selfsufficiency in staple foods; a trend which is accelerating in the wake of the Covid-19 pandemic. 

Stay home and stay safe, everyone.

[specuvestor]

My only contribution here is that management guidance and results seems to have no correlation. I know markets and valuations but I doubt I know the Business better than management. If they consistently can't see what's coming, I doubt I can.

It’s strange that their guidance didn’t factor in the cyclical nature ever since their IPO

If mgt is clueless I think OPMI should build in more margin of error

After reading all post about this company. It feels more confusing than before.
Recently a lot share buyback? Any care to comment on its value?

Japfa's management believes the market is grossly undervaluing their shares. According to them the very bad Q1-3 profits are part of the cyclical nature of the poultry business and the market is overreacting to the results.

[Raks]

https://www.businesstimes.com.sg/compani...-northstar

AGRI-FOOD company Japfa will sell 80 per cent of its South-east Asia-branded dairy business to affiliates of investment firms TPG and Northstar Group for US$236 million in a strategic partnership, it said in an exchange filing on Monday.