Japfa upgraded to Add by CGS-CIMB on recovery in Indonesia poultry, swine fattening

Indonesian rupiah notesIndonesian rupiah notes

CGS-CIMB upgraded Japfa to Add from Reduce on expectations that the recent recovery in the Indonesian poultry and swine fattening divisions will be sustainable.

“Post five culling exercises in fiscal 2017 and the ban on antibiotic use in poultry feed in January 2018, Indonesia’s poultry industry is now facing a supply crunch,” the brokerage said in a note recently.

It added prices could stay robust as supply should remain benign for at least the next two years as the growth cycle of grand-parent stock to broiler is around two years, with locals preferring fresh poultry to frozen imports.

There’s “still time to ride the chicken run,” it said, noting that the antibiotic ban appears to increase the broiler mortality rate by around two to three times and extends the growth cycle by a few days.

It noted that first half results were a “bumper harvest,” with a core net profit of US$55.9 million, with the usually seasonally strong second quarter getting an extra boost from especially high feed margins and average selling prices for day-old chicks and broilers.

The turnaround in the swine-fattening business also returned the animal protein other segment to profit, it added.

CGS-CIMB noted that average second-quarter Vietnamese swine prices recovered strongly, likely on supply shortages after a plunge in swine prices caused farmers to abandon swine breeding.

“The rally in current hog prices could be more sustainable (vs. a temporary hike in July 2017) as it now seems to be driven by domestic demand,” it said, citing its Vietnam team.

It raised its target price for Japfa to S$0.80 from S$0.55.

But it lowered its earnings forecasts after a change of analyst, cutting 2018-19 core earnings per share forecasts, with its projected net profit growth over 2018-2020 now at 179 percent, 15 percent and 15 percent respectively. That implies a compound annual growth rate (CAGR) over 2018-20 of 10.5 percent, it said.

The stock ended Friday up 2.42 percent at S$0.635.

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