Brokers' take: CGS-CIMB upgrades Japfa to 'add' on listing of China dairy unit

CGS-CIMB has upgraded Japfa to "add" from "hold", as the planned listing of its China dairy unit could realise a valuation of up to US$730 million for the agri-food company's shareholders.

In a report on Thursday (Mar 31), analyst Tay Wee Kuang also estimates that Japfa's share price could hit S$0.81, which represents a potential upside of 12.5 per cent from its Wednesday closing price of S$0.72.

Japfa announced on Tuesday that it had applied to list its dairy unit in China, AustAsia Investment Holdings, on the mainboard of the Stock Exchange of Hong Kong.

As part of a capital reduction exercise related to the listing, Japfa is also proposing a distribution-in-specie of its entire shareholding in AustAsia, which will see eligible shareholders receiving AustAsia shares in proportion to their respective shareholdings in Japfa.

Tay said that he switched the valuation method from a price-to-earnings valuation to a sum-of-parts method on the belief that potential value could be unlocked from the listing.

Its valuation consists of S$0.48 for each share of AustAsia benchmarked to Japfa's sale of a 12.5 per cent stake in the unit in FY2021, as well as a price-to-earnings ratio of 6 times in FY2023 for the agri-food company's remaining animal protein business.

This is lower than the previous valuation of a price-to-earnings ratio of 7 times in the same financial year for its entire business, as Tay believes that the valuations may not be as rich for the animal protein business compared to the China dairy business.

With its remaining 62.5 per cent stake in AustAsia, Japfa could realise a potential equity value of US$730 million if it goes public.

Based on its Wednesday share price, this leaves Japfa with a remaining equity value of about US$358.5 million, which could lead to its enterprise value (EV) being 4.3 times its earnings before interest, taxes, depreciation and amortisation (Ebitda), and a price-to-earnings ratio of 4.4 times in FY2023.

"We think (it's) attractive, even though short-term profitability could be affected by margin pressures as a result of rising raw material prices," said Tay.

Beyond just Japfa's stake in AustAsia and its impact on the agri-food company's shareholders, Tay believes that the China dairy farm would realise a total equity valuation of US$1.17 billion based on Japfa's 12.5 per cent stake sale in FY2021.

This valuation would translate to its EV being 11.6 times its Ebitda, and a price-to-earnings ratio of 13.1 times, which is higher than other China dairy farm businesses, noted Tay.



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