Japfa Q2 profit drops by 83.1% on fair value loss and higher sales costs

MAINBOARD-LISTED agri-food producer Japfa's second-quarter net profit plummeted, on a large fair-value loss for "biological assets", compared with the previous year's gain.

Earnings were down by 83.1 per cent to US$4.99 million for the three months to June 30, down from US$29.6 million the year before, according to unaudited results released on Tuesday.

The drop, which was not helped by a higher cost of sales, came even as revenue improved by 8.2 per cent to US$975 million, on more animal feed sales - chicken feed in Indonesia, India and Myanmar, and fish food in Indonesia - and a stronger dairy segment.

The loss from changes in biological assets' fair value came up to US$10.1 million, on lower swine prices in Vietnam and a higher feed cost that was used in the valuation of future income flows for Japfa's dairy cattle herd in China.

Meanwhile, the "other animal protein" division notched an operating loss in the quarter - no thanks to a lower swine fattening average selling price in Vietnam - while consumer food, faced with competition in Indonesia, was also in the red.

On the chicken front, Indonesian animal protein margins thinned on what Japfa attributed to a "supply and demand imbalance" that hurt broiler average selling prices.

Earnings per share for the three months slipped to 0.27 US cent, compared with 1.63 US cents previously, while net asset value was US$0.42 a share, unchanged from Dec 31, 2018.

Tan Yong Nang, chief executive officer of Japfa, reiterated in a statement: "The agri-food business is subject to cyclicality and other external factors that are beyond our control.

"This is exactly what happened in this quarter, with our profitability affected by low (average selling price) in two of our core business pillars."

Japfa warned in its outlook statement that Vietnam is in the throes of an African swine fever outbreak, which has hurt the group's financial performance, as strict bio-security measures have raised the cost of production while sales volume of feed is expected to fall on the pre-emptive culling of livestock.

Poultry-related operations in Myanmar could take a near-term hit to profitability on higher competitive pressures and higher local corn prices, while higher feed costs have tightened margins in the Chinese dairy business despite an increase in raw milk prices, the group noted.

But Japfa added that the emerging markets where it operates "continue to witness growing animal protein consumption", which bodes well for medium- to long-term growth.

Net profit for the half-year fell by 72.3 per cent to US$12.8 million, while revenue grew by 8 per cent to US$1.89 billion. No dividend was recommended, unchanged from the year before.

Japfa lost US$0.01, or 1.91 per cent, to US$0.515, before the results were released.