DBS report

On cusp of a sustained turnaround

• Reinstate with an upgrade to BUY with TP of SGD0.45, equivalent to 6.5x FY25F earnings
• Normalising supply dynamics in Indonesia and Vietnam should support broiler and DOC prices in both countries, and swine prices in Vietnam
• Turnaround in Vietnam&rsquo s exports should boost job creation and stabilise animal protein consumption
• Upcoming 2Q24 results is expected to confirm the turnaround, with profits to more than double from a low of USD28mn to USD68mn

Reinstate with BUY, TP: SGD0.45 for potential  46% upside.  We reinstate coverage on Japfa Ltd on expectations that the turnaround seen in its operating profits in 1Q24 can be sustained through 2024.  We believe the stock is a good buy for three reasons: (i) attractive proxy to business recovery at Japfa Comfeed, (ii) it should benefit from a turnaround in the Vietnam business, and (iii) the market yet to price in the recovery with valuations attractive at  6.9x/  4.3x FY24F/ 25F PE,  below peers&rsquo average of ~12x. 

Upcoming 2Q24 results could provide confidence.  Based on market prices of broiler and swine prices in its key markets, we expect to see further affirmation of this turnaround from its upcoming 2Q24 earnings. We believe both main engines &ndash Indonesia and Vietnam operations are starting to fire up. For Indonesia operations (Japfa Comfeed Tbk), we project its FY24F operating profit to grow ~1.5x to USD207mn, from the low of USD141mn in FY23. For Vietnam, we project its FY24F operating profit to turn around from a loss of USD27mn to USD43mn.

Market has yet to fully price in the turnaround for Japfa Ltd.  While Japfa&rsquo s share price has performed relatively strongly YTD, up by over 30%, we believe the market has yet to fully price in the potential recovery of its Vietnam operations as well as share price appreciation in Japfa Comfeed Tbk. Based on last traded price of Japfa Comfeed Tbk at ~IDR1,700/share (~55.4% owned), the implied equity value of Japfa&rsquo s stake is USD690mn. This stands at  ~ 50% premium to Japfa&rsquo s current market cap of USD463mn. This suggests the market is not attributing any value to its operations outside of Indonesia, which is unwarranted.