TL;DR Despite strong growth in the recent year, Japfa still has fairly weak profitability. However, they seem well poised to tap on the growth in the middle class in Asia and so have strong growth potential.
Source: Japfa Annual Report 2018
Business Profile
Japfa is a vertically integrated agri-food company, from ownership of a livestock breeding business to the packaging of food and production of dairy products for sale at supermarkets. The Indonesian business is operated under its 52.4%-owned subsidiary Japfa Comfeed Indonesia and the dairy business through AustAsia.
SWOT Analysis
Strength: Japfa has a diversified business model across products and countries. This can cushion against sluggish prices from weak local consumer behaviour. They are also experienced in farm management and possess technical know-how. This can also help Japfa identify the cash cows in respective markets and focus to grow the identified cash cows by replicating its business model.
Weakness: Most of the products that Japfa holds seems more commoditized products. This means that product differentiation may be more challenging and customers may easily switch from product to product. Additionally, Japfa may be pressured to keep prices low to keep their prices competitive which may lower profitability.
Source: The Asian Middle Class on the Rise - Statista
Opportunities: There are expected double-digit growth in the Vietnam market for poultry due to the growth of the middle class. Also, milk demand in China is expected to remain robust in the years ahead, supported by its recently enacted second child policy. Chinese consumers also desire high-quality milk and the company can supply superior and stable raw milk supply to major milk brands. Moreover, meat consumption is still far below levels in developed markets and global averages and may increase soon.
Threats: There might be an impact from the swine flu outbreak in the North of Vietnam, although farms haven't been affected yet. However, a lowered supply may lead to increase in prices. There is also a chance that demand may drop also, an increase in corn prices also increases production costs. Furthermore, Japfa is exposed to volatile movements in raw material costs and currencies.
Financials
Income Statement
Source: Japfa Annual Report FY2018
Revenue had increased by 10.8% due to higher feed sales volume and higher poultry ASPs recorded by Japfa’s Indonesian subsidiary. This was also helped by the swine market recovery in Vietnam. Also, Japfa’s full ownership of the Dairy segment permitted the recognition of this segment’s entire contribution.
Source: Japfa Annual Report FY2018
The Asian Middle Class on the Rise
Operating profit grew 81.2% mainly due to strong prevailing Day Old Chicks and broiler average selling prices lifting PT Japfa Tbk’s operating profit, as well as the turnaround in profitability for the APO segment.
Source: Japfa Annual Report FY2018
Financially, the company had made significant improvements.
Balance Sheet
The business seems to be able to deal with short-term liquidity well, with a current ratio of 1.51. However, the quality of such current assets may not be strong because a lot of them are made up of inventory and biological assets. This is not surprising given the nature of their business. This is reflected in how quick and cash ratios are significantly lower.
The company seems to be holding a lot of debt as well. As seen by their leverage and coverage ratios. This could imply that their balance sheet strength is slightly weaker since more cash would need to be reserved for paying back debt and interest payments.
Cashflows
The company seems to be able to generate enough amount of cash flow from operating activities to take care of almost all their investing and financing needs. This is probably helped by their negative cash conversion cycle, where their working capital management had allowed it to generate positive cash flows. The main reason why investing activities consumes so much cash is that there is a lot of purchases of plant, property and equipment.
Overall, enough cash is needed to at least pay out dividends when compared to the free cash flow that they hold, and with a relatively low dividend payout ratio.
Operating Metrics
Japfa's operating metrics also seem fairly low. This could be from their relatively low net profits, but also its large asset base and high invested capital.
TL;DR Despite strong growth in the recent year, Japfa still has fairly weak profitability. However, they seem well poised to tap on the growth in the middle class in Asia and so have strong growth potential.
Source: Japfa Annual Report 2018
Business Profile
Japfa is a vertically integrated agri-food company, from ownership of a livestock breeding business to the packaging of food and production of dairy products for sale at supermarkets. The Indonesian business is operated under its 52.4%-owned subsidiary Japfa Comfeed Indonesia and the dairy business through AustAsia.
SWOT Analysis
Strength: Japfa has a diversified business model across products and countries. This can cushion against sluggish prices from weak local consumer behaviour. They are also experienced in farm management and possess technical know-how. This can also help Japfa identify the cash cows in respective markets and focus to grow the identified cash cows by replicating its business model.
Weakness: Most of the products that Japfa holds seems more commoditized products. This means that product differentiation may be more challenging and customers may easily switch from product to product. Additionally, Japfa may be pressured to keep prices low to keep their prices competitive which may lower profitability.
Source: The Asian Middle Class on the Rise - Statista
Opportunities: There are expected double-digit growth in the Vietnam market for poultry due to the growth of the middle class. Also, milk demand in China is expected to remain robust in the years ahead, supported by its recently enacted second child policy. Chinese consumers also desire high-quality milk and the company can supply superior and stable raw milk supply to major milk brands. Moreover, meat consumption is still far below levels in developed markets and global averages and may increase soon.
Threats: There might be an impact from the swine flu outbreak in the North of Vietnam, although farms haven't been affected yet. However, a lowered supply may lead to increase in prices. There is also a chance that demand may drop also, an increase in corn prices also increases production costs. Furthermore, Japfa is exposed to volatile movements in raw material costs and currencies.
Financials
Income Statement
Source: Japfa Annual Report FY2018
Revenue had increased by 10.8% due to higher feed sales volume and higher poultry ASPs recorded by Japfa’s Indonesian subsidiary. This was also helped by the swine market recovery in Vietnam. Also, Japfa’s full ownership of the Dairy segment permitted the recognition of this segment’s entire contribution.
Source: Japfa Annual Report FY2018
The Asian Middle Class on the Rise
Operating profit grew 81.2% mainly due to strong prevailing Day Old Chicks and broiler average selling prices lifting PT Japfa Tbk’s operating profit, as well as the turnaround in profitability for the APO segment.
Source: Japfa Annual Report FY2018
Financially, the company had made significant improvements.
Balance Sheet
The business seems to be able to deal with short-term liquidity well, with a current ratio of 1.51. However, the quality of such current assets may not be strong because a lot of them are made up of inventory and biological assets. This is not surprising given the nature of their business. This is reflected in how quick and cash ratios are significantly lower.
The company seems to be holding a lot of debt as well. As seen by their leverage and coverage ratios. This could imply that their balance sheet strength is slightly weaker since more cash would need to be reserved for paying back debt and interest payments.
Cashflows
The company seems to be able to generate enough amount of cash flow from operating activities to take care of almost all their investing and financing needs. This is probably helped by their negative cash conversion cycle, where their working capital management had allowed it to generate positive cash flows. The main reason why investing activities consumes so much cash is that there is a lot of purchases of plant, property and equipment.
Overall, enough cash is needed to at least pay out dividends when compared to the free cash flow that they hold, and with a relatively low dividend payout ratio.
Operating Metrics
Japfa's operating metrics also seem fairly low. This could be from their relatively low net profits, but also its large asset base and high invested capital.