CGS-CIMB downgraded Japfa to Reduce from Add amid potentially higher costs as the company enhances biosecurity measures amid an African Swine Fever outbreak in Vietnam and as poultry margins could moderate.
“At current valuations, we believe the market has priced in weaker Vietnam swine profits, mainly attributable to the potential impact of ASF outbreak in Vietnam,” the brokerage said in a note on Wednesday.
So far, while ASF is spreading rapidly in Vietnam, it hasn’t stuck any of Japfa’s swine farms to-date and industrial farmers such as Japfa stand a better chance of avoiding infection, but the company said it could see higher costs on biosecurity measures and lower swine feed sales volumes, the note said.
CGS-CIMB said it expected the share price could re-rate through the third quarter on sustained poultry margins in Indonesia ahead of the Lebaran season and on a continued shortage in day old chick (DOC) supply.
But it added that the share price could retrace later.
“In the longer term, potentially narrower year-on-year growth for Japfa’s poultry business towards fiscal 2020 and larger-than-expected disruption in the Vietnam swine business could be risk factors,” the note said.
The brokerage pointed to the likelihood supply and demand would stabilize as imported DOCs hit the market and as Indonesia’s corn prices have risen, potentially hurting feed-margin growth.
It cut its target price to S$0.63 from S$0.90 and lowered its 2019-2020 earnings per share forecasts by 1.4 percent to 5.9 percent.