Japfa still has long-term goals in sight

Singapore

INDUSTRIAL farming group Japfa Limited is still working towards its long-term goal of having four strong business pillars, even as it battles short-term headwinds by ensuring that it remains a low-cost producer.

The mainboard-listed group has seen wild swings in its earnings. For 2017, it reported a steep drop in net profit to US$1.3 million, from US$118.8 million the previous year, despite a 5 per cent growth in revenue to US$3.2 billion.

This was due to operating losses in its Vietnam swine business, as well as lower operating profit in its Indonesian poultry business PT Japfa Tbk.

In the first quarter of this year, smaller losses in Vietnam and higher profitability in PT Japfa Tbk propelled net profit 703 per cent higher to US$16.68 million compared to the year-ago period, on the back of a 15 per cent increase in revenue to US$845.53 million.

Excluding fair value changes and one-off items, core net profit without forex rose 288 per cent to US$28.31 million, said the firm in results released on Monday.

Price volatility in its products is not new, said Japfa's chief executive Tan Yong Nang. "We're used to this. I'd like people to understand that that is something that will continue," he told The Business Times in an interview.

"How we counter that is by focusing on what we do best - keep doing the business day in and day out, getting the right people, building the right people so that we can have the best productivity and management. Over time, (the prices) will sort itself out."

In Vietnam, the group has been pressured by significantly lower selling prices for swine after China imposed restrictions on cross-border imports in the fourth quarter of 2016.

Because of that, the industry became oversupplied, said Mr Tan. As at end-March, swine prices still remained at levels below cost.

Prices, however, have further improved in April, indicating that supply is continuing to adjust to local demand with marginal players leaving the market, he added.

In his view, the import restrictions are actually a blessing in disguise for the firm, as the departure of these marginal non-industrialised players which dominate the fragmented Vietnamese swine market would create more room for Japfa to grow.

"While we wait for Vietnam's supply to re-adjust down to the new level of demand, we will continue to focus on cost containment initiatives to lower our swine fattening costs and ramp up efficiency," he said.

Meanwhile, the group's largest business - poultry in Indonesia - is now on a more stable clip. The operations there had suffered in 2015 due to an industry oversupply of day-old chicks, and subsequently recorded exceptional profits in 2016.

"Last year was a more stable year," said Mr Tan. "We continue to see the stability going forward."

The main challenge in the Indonesian poultry business is the anti-trust regulations, he added.

The group's subsidiary Japfa Comfeed Indonesia Tbk, which is listed in Jakarta, had been slapped with a fine in October 2016 alongside 10 other poultry companies over alleged cartel practices. In November last year, the district court accepted the appeal of 11 companies including PT Japfa against the verdict.

But the firm cannot close the chapter on this yet as the government has gone to the supreme court to appeal against the district court's decision.

"These regulations are a bit difficult to deal with," said Mr Tan, "but it's common to all (players), so it's something we need to deal with."

Japfa also warned in its latest results that the Indonesian government has been introducing more measures to regulate the agri-food sector, which may affect market supply and demand dynamics.

In time to come, the group's diversification into different animal proteins and countries should help to iron out such price volatility.

Japfa produces milk, poultry and beef in Indonesia. It has replicated the same industrial farming business model elsewhere, growing poultry and swine in Vietnam, poultry in Myanmar and India, and cows in China for dairy products and beef.

Mr Tan said that the revenue streams from these businesses "are not that well correlated to one another". But while uncorrelated, these are related businesses which require the same mindset and understanding, he emphasised.

For now, the group has established 2.5 pillars, up from the 1.5 pillars that it had when it listed on the Singapore Exchange in 2014, said Mr Tan. "We have a strong pillar in Indonesia (poultry) and dairy (in China and Indonesia), and our swine business is coming along as well."

The last pillar, consumer products in Indonesia, will take some more time before it comes into its own. Japfa markets fresh milk, UHT milk and cheeses under the Greenfields brand, and makes processed meat products under the So Good and So Nice brands in Indonesia.

"Even though we have very strong branding and we are very strong in Indonesia, I think the environment is still quite challenging for the time being," said Mr Tan.

The group has completed the acquisition of the remaining interest in its dairy business AustAsia from Black River Funds, managed by food and agriculture-focused private equity player Proterra Investment Partners LP, for US$263.1 million in cash and shares.

AustAsia owns fairy farms in China and Indonesia through two subsidiaries and also the Greenfields milk downstream business.

The consideration comprises a US$223 million cash payment funded through bank borrowings, and the issuance of 90 million Japfa shares at 60 Singapore cents a share.

Mr Tan explained that while the private equity fund had been a good partner and wanted to continue working with Japfa, they also wanted some liquidity in their shares. Hence, the deal to sell two-thirds of their interest in a cash deal, and the other one-third for shares in Japfa.

"So to me this is really a win-win situation. First they get some cash out. We're very happy with their investment and cooperation so far. Yet by flipping up, they continue to participate in the longer-term upside of Japfa Limited."

And now that Japfa fully owns AustAsia, it can be more nimble and take a longer term view on its business plan, he added.

The fact that Black River also agreed to buy Japfa shares at 60 Singapore cents - compared with the market price of 48.5 Singapore cents on the day of the announcement - is also a "certain endorsement" of the value of Japfa shares, said Mr Tan.

Asked how long the group might take to reach the goal of having a quarter of its net profit come from each of the four pillars, Mr Tan replied that it will not happen in the next three to five years as it will be a long-term goal. "(But) I don't just look at profitability. To me, it's about the size of the business, the strength of the business, and whether we have the expertise and the people."

Amendment note: An earlier version of this piece stated that Japfa made net profit of US$22.6 million last year. The article has been changed to reflect the audited profit figure which was revised downwards to US$1.3 million. In addition, the price of Japfa shares issued to Black River is 60 Singapore cents, and not 60 US cents as earlier stated.