AGRI-FOOD group Japfa : UD2 0%’s plan to unlock value has encountered minor hurdles, after shares of its newly-listed China dairy unit ended their first day of trading below the offer price. The listing also led S&P Global Ratings to downgrade the group’s Indonesian unit Japfa Comfeed Indonesia.

AustAsia Group shares closed at HK$6.37 in Hong Kong on Friday (Dec 30), HK$0.03 below the offer price of HK$6.40.

The company had sold 30.6 million shares, split on a 90-10 basis: 27.6 million shares were listed as “international offer shares” and 3.1 million shares were listed as “Hong Kong offer shares”. The international offer received applications for 1.16 times the number of shares on offer, while the Hong Kong offer was 2.08 times subscribed.

Japfa said certain “cornerstone investors” had subscribed for a total of 24.3 million AustAsia shares, representing 3.5 per cent of total issued share capital and 79.3 per cent of the offering. This is assuming the over-allotment option is not exercised.

The over-allotment option granted allows AustAsia’s international underwriters to allot and issue an additional 3.1 million shares, or about 10 per cent of the 30.6 million shares initially offered, at the same offer price, to cover over-allocations in the international offering. The option is exercisable at any time from Dec 30, 2022 till Jan 20, 2023.

Japfa’s loan capitalisation agreement with AustAsia also took effect on Friday. Under the agreement, AustAsia issued 31 million new shares at the price of HK$6.40 to Japfa to satisfy the capital value of existing shareholder’s loans, which amounted to US$25.5 million.

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Japfa now holds 419.7 million shares in AustAsia, representing 60 per cent of AustAsia’s enlarged post-initial public offering (IPO) share capital.

Shareholders of Japfa received one AustAsia for every five Japfa shares held as a distribution-in-specie ahead of the IPO. Japfa shares were halted before the open on Dec 28, the ex date of the distribution.

The stock fell after the halt was lifted on Dec 30, as investors priced in the impact of the distribution and the spinning off of AustAsia. They ended at S$0.345 on Dec 30, down S$0.19 from their close on Dec 27 at S$0.535.

That means Japfa shareholders still ended the day in a net positive position, as the value of a fifth of an AustAsia share would work out to S$0.22 at present exchange rates.

Japfa had intended for the listing to allow Japfa shareholders to participate in the growth of “two distinct and leading agri-food businesses – in animal proteins and dairy, respectively”.

But the AustAsia listing also alters the distribution of Japfa’s earnings slightly.

Japfa’s operations include an Indonesia listing, Japfa Comfeed Indonesia. S&P Global Ratings said in a note that the latter’s creditworthiness has deteriorated after the distribution-in-specie.

The ratings agency noted that the Indonesian unit will now account for 80 to 90 per cent of its parent’s consolidated earnings before interest, taxes, depreciation and amortisation, and between 60 and 70 per cent of the consolidated debt.

Elevated feedstock costs will continue to compress operating margins and increase working capital needs for both entities in 2022 and 2023, resulting in higher leverage and tighter liquidity compared with 2021, S&P analysts added.

Japfa Comfeed’s long-term issuer credit rating was thus lowered to “B+” from “BB-”. According to the ratings agency, a “B” means the company is “more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments”. A “BB” rating suggests a company is less vulnerable in the near term.

S&P Global also downgraded Japfa Comfeed’s senior unsecured notes to “B+” on Friday.

The agency said a further drop in rating could follow if Japfa’s leverage deteriorates from its expectations, or if the company’s liquidity profile “weakens notably”.