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06-01-2018, 07:14 PM
Japfa is an okay business, but its leverage and currency exposure makes it unattractive for any long-term consideration.
1) The group's largest contributor to profit is the sale of day-old-chicks (DOC) and poultry feed, in Indonesia. Its poultry businesses in the rest of SEA are too small to be considered important. So a large extent of the group's prosperity depends on Indonesian policies concerning the broiler industry. Charoen Pokphand (CP) -- one of the largest Thai agribusiness and conglomerate -- commands the highest market share for sale of DOC at about 40%. Japfa is second with about 25%, with the remaining being fragmented smaller players. Given their combined market share, CP and Japfa could easily raise or lower broiler prices, by expanding or contracting operation. If prices are too low, consumers will benefit but the smaller poultry farmers will suffer. If prices are too high, the poultry farmers will be happy but consumers will be upset. So the government (certain sections, at least) -- assuming it acts in the interest of its general population -- will want prices to be stable and inflation to be minimal. For this to happen, the market for broiler can only be allowed to expand as fast as the income of the general population. Therefore, even if Japfa has the financial means to expand capacity, such actions may not be viewed kindly by the (non-interested) authorities if the broiler market is deemed to be adequately supplied. It will therefore be safer for investors to assign a small growth rate to Japfa's poultry business.
The news suggests CP and Japfa may have some of the regulators in their pockets. But it seems they won't have such an easy time, perhaps until they are able to get KPPU on their side as well.
http://www.thejakartapost.com/news/2016/...rdict.html
http://www.businesstimes.com.sg/companie...es-verdict
2) The other large contributor to Japfa is the production of raw milk in China. While the revenues appear small, the margins are large. Prior to IPO, Japfa was able to sell its milk at high ASPs but it is now more subdued. Management's tacit acknowledgement of more stable ASPs can also be seen from the 5-year off-take deal with Yili, just 1 year after IPO when it said in its prospectus they do not enter into contract that are longer than a year. Like broiler prices in Indonesia, I do not think that Chinese government will want milk prices that is rising faster than what the general population perceive is a fair price. Recent history has shown that China is willing to use price controls to manage food inflation. If ASPs are expected to be stable, the only way for Japfa to grow will be to expand production. And according to the growth in their numbers of milking cows, it seems they have been doing this in a big way since pre-IPO. Just last month, Japfa bought out its equity partner Black River (Cargill subsidiary) in the China raw milk business by paying US$263m for the 38% stake. Japfa had until September 2018 to either IPO the milk business -- AustAsia Investment Holdings -- or buy out Black River's stake. By making its choice in the latter when it still had time to do the former, it seems Japfa views the milk businesses to be a key driver of profits. The financial results since IPO confirms this as well.
3) The expansion of its poultry, milk, and to a lesser extent its cattle and swine businesses, incurs enormous debts which amount to about US$1.15b against an equity of US$780m. This includes a new US$280m 3-year term loan to finance the AIH acquisition. There was some effort to manage its debt by selling shares in Japfa Comfeed in 2016, but its not much to make a difference. While USD loans are cheaper compared to IDR, the enormous USD debts (about half of all its debt) could potentially cripple Japfa if IDR devalues against USD. As USD interest rates are rising, there is a higher possibility of this (slowly) happening. Indonesia has been building up its forex reserves since 1997, so maybe if could protect itself better against currency attacks.
1) The group's largest contributor to profit is the sale of day-old-chicks (DOC) and poultry feed, in Indonesia. Its poultry businesses in the rest of SEA are too small to be considered important. So a large extent of the group's prosperity depends on Indonesian policies concerning the broiler industry. Charoen Pokphand (CP) -- one of the largest Thai agribusiness and conglomerate -- commands the highest market share for sale of DOC at about 40%. Japfa is second with about 25%, with the remaining being fragmented smaller players. Given their combined market share, CP and Japfa could easily raise or lower broiler prices, by expanding or contracting operation. If prices are too low, consumers will benefit but the smaller poultry farmers will suffer. If prices are too high, the poultry farmers will be happy but consumers will be upset. So the government (certain sections, at least) -- assuming it acts in the interest of its general population -- will want prices to be stable and inflation to be minimal. For this to happen, the market for broiler can only be allowed to expand as fast as the income of the general population. Therefore, even if Japfa has the financial means to expand capacity, such actions may not be viewed kindly by the (non-interested) authorities if the broiler market is deemed to be adequately supplied. It will therefore be safer for investors to assign a small growth rate to Japfa's poultry business.
The news suggests CP and Japfa may have some of the regulators in their pockets. But it seems they won't have such an easy time, perhaps until they are able to get KPPU on their side as well.
http://www.thejakartapost.com/news/2016/...rdict.html
http://www.businesstimes.com.sg/companie...es-verdict
2) The other large contributor to Japfa is the production of raw milk in China. While the revenues appear small, the margins are large. Prior to IPO, Japfa was able to sell its milk at high ASPs but it is now more subdued. Management's tacit acknowledgement of more stable ASPs can also be seen from the 5-year off-take deal with Yili, just 1 year after IPO when it said in its prospectus they do not enter into contract that are longer than a year. Like broiler prices in Indonesia, I do not think that Chinese government will want milk prices that is rising faster than what the general population perceive is a fair price. Recent history has shown that China is willing to use price controls to manage food inflation. If ASPs are expected to be stable, the only way for Japfa to grow will be to expand production. And according to the growth in their numbers of milking cows, it seems they have been doing this in a big way since pre-IPO. Just last month, Japfa bought out its equity partner Black River (Cargill subsidiary) in the China raw milk business by paying US$263m for the 38% stake. Japfa had until September 2018 to either IPO the milk business -- AustAsia Investment Holdings -- or buy out Black River's stake. By making its choice in the latter when it still had time to do the former, it seems Japfa views the milk businesses to be a key driver of profits. The financial results since IPO confirms this as well.
3) The expansion of its poultry, milk, and to a lesser extent its cattle and swine businesses, incurs enormous debts which amount to about US$1.15b against an equity of US$780m. This includes a new US$280m 3-year term loan to finance the AIH acquisition. There was some effort to manage its debt by selling shares in Japfa Comfeed in 2016, but its not much to make a difference. While USD loans are cheaper compared to IDR, the enormous USD debts (about half of all its debt) could potentially cripple Japfa if IDR devalues against USD. As USD interest rates are rising, there is a higher possibility of this (slowly) happening. Indonesia has been building up its forex reserves since 1997, so maybe if could protect itself better against currency attacks.