Hot stock: Japfa climbs 10.8% after proposing dairy unit's stake sale

SHARES in agri-food company Japfa jumped more than 10 per cent on Thursday morning, after the company announced the previous night that it is looking to sell a 25 per cent stake in its China dairy business to Japanese conglomerate Meiji for some US$254.4 million.

As at 11.58am on Thursday, the mainboard-listed counter was trading at 56.5 Singapore cents, up 5.5 cents or 10.8 per cent. The counter eased slightly to 56 Singapore cents as at 12.51pm, up five cents or 9.8 per cent, with some 4.5 million shares changing hands. Singapore-headquartered Japfa had requested a trading halt on Wednesday morning. The firm lifted the halt after trading hours, once it had announced the proposed stake sale.

Overall, analysts view Japfa's partial divestment of its dairy business to Meiji as a positive.

UOB Kay Hian has maintained its "buy" call on the counter, increasing its target price to S$0.90 from S$0.88 previously, after raising the valuation for Japfa's dairy business.

Likewise, CGS-CIMB has reiterated its "add" call for the counter, while maintaining a target price of S$0.95.

"We view this as a positive move as it allows Japfa to partner a renowned dairy player, unlock value to recognise US$37 million gains and pare down its debt," wrote UOB Kay Hian analysts John Cheong and Joohijit Kaur in a research note on Thursday.

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That said, the UOB analysts have reduced Japfa's core earnings forecasts for FY20-21 by 9 per cent and 4 per cent respectively, in view of the smaller ownership in the dairy business and after factoring weakness in Indonesia's poultry segment, amid the Covid-19 pandemic.

Post-transaction, Japfa will retain a 75 per cent stake in its wholly-owned subsidiary AustAsia Investment Holdings, which operates the group's diary farming business in China.

Japfa said the move is expected to strengthen its position as a raw milk producer in the growing Chinese dairy industry.

The company stands to gain US$37 million from the proposed deal, which it intends to use for repayment of a US$253 million term loan.

In addition, AustAsia will get to supply raw milk to Meiji on a five-year rolling basis, renewable annually. This will provide it with a stable revenue stream, Japfa said.

The deal is subject to approval by Japfa's shareholders at an extraordinary general meeting to be convened, after the company's annual general meeting (AGM) set to be held on, or about June 25.

This comes after Japfa deferred its AGM, in line with measures implemented by the Ministry of Health on physical meetings, and announcements by Singapore Exchange Regulation granting companies a 60-day extension to hold their AGMs.