JAPFA Ltd.

JAPFA Ltd (or the "Company") is offering 248m shares at $0.80 each for a listing on the Singapore Exchange. The IPO will close on 13 August 2014 at 12pm and starts trading on 15 August. The international offering will be 231.2m shares with the balance 16.8m shares for the public (at least this is a decent amount). There is an option to over-allot 37.2m shares for stabilization and the placement tranche was 5x covered despite the recent weak sentiments.

Principal Business

JAPFA is a leading agri-food company that produces multiple protein foods with operations in 5 high growth emerging Asian markets. The Company has a long history and developed core competencies in animal feed production, animal breeding, livestock fattening and consumer food.

Dairy business

This is quite an informational prospectus, so I decided to cut and paste the pictures above. It has a growing diary business in China and supply to leading producers there such as Yili and Mengniu. 

A quick look at trading comps for some of the dairy companies in China is presented below (source from Capital IQ).

You can see that the trading comps are trading at rich valuation in China for Dairy companies from between 20-40x PE. However, having said that, the overall revenue from China and from Dairy is still low, contributing only 3.5% of the Company's topline. If the Dairy business can continue to increase, the valuation of the Company will likely head north as it will become an interesting acquisition target for the Chinese companies.

Animal Protein Business

The Company is also a producer of high quality animal proteins and premium feed. This is the main business line for the company, contributing to the majority of the revenue. It is a low margin but stable business. I believe the Company is trying to position itself away from business into the higher value add diary and consumer food businesses.

Consumer Food

The Company manufactures frozen food in Indonesia and Vienam under the "So Good", "So Nice"and "So Fresh" brands.

Financial Highlights

Revenue has been increasing steadily over the last 3 years but unfortunately, the profits has fluctuated over the years with Q1 2014 coming in lower as well. Having said that, i am pleased to see an increasing EBITDA line over the last 3 years. 

What i like about the Company

• One of the largest poultry producer in Indonesia
• Leading premium milk producer in China
• Emerging market is the right place to be with rising income and a large population
• Vertically integrated business model allows the Company to extract profits across the value chain
• Promising diary business in China and with a leading position in Indonesia 
• Strong growth strategies in key markets to replicate farms and facilities in Inner Mongolia and China
• Well diversified agri business
• The independent directors subscribed for the reserved shares in a meaningful way of between 300,000 to 625,000 shares

My Concerns

• Live stock business while profitable, is always difficult to handle due to factors such as internal controls. 
• Biological assets are hard to value and "stock take" and any natural disease or man-caused scandals can wipe the entire live stock or affect the company drastically
• Still primarily an Indonesia firm with >80% revenue derived from there, implying single country risk as well as exposure to Indonesia currency, which can be very volatile
• Still primarily a "family-owned" by Santosa with a shareholding of > 64%
• The Company is highly levered with debts bearing interest of between 6-13% and the net margins is too low for my liking. Having said that, if the Company is listed and can refinance its debt at lower interest rates, it will help improve the profitability going forward
• With all due respect to RSM, the accounts are not audited by a Big 4

Valuation

The pro-forma NAV is about S$0.66 and the listing price of $0.80 represents a price to book of around 1.2x, which in my view, is a reasonable price to buy for an established business.

Mr IPO's rating

I quite like this sector in which the Company is playing and that we can attract the Company to list here. My key concern will be the highly geared nature in which the Company is taking on debt to expand. To pay 12.75% interest rate on the notes is crazy given the low interest rate environment. I have done a quick and dirty forecast to derive the fair value (which i believe is totally off-mark so read at your own risk).

I have assumed a fair value of 15-18x PE and 6-7x EBITDA which i believe is fair for JAPFA. I am sure if the business is available at 6x EBITDA, many PE firms will be queuing up to acquire the firm. Based on the PE basis, the fair value range comes in at between 91-110c and based on the EBITDA range, the fair value comes out at between 85c to 100c. 

According to the Edge report, Marubeni is coming in as an anchor investor. The original book building range was between $0.75 to $0.87 and the Company priced it a $0.80 eventually given the current IPO sentiments.

Setting the high debts aside, i believe the Company is interesting enough for the medium term with growth initiatives coming on stream. I will give it a 2 Chilli ratings for the medium term but do watch the debt level closely and see if the Company is able to pay down its debt or refinance them at a lower cost.  

Happy Mooing.