• We turn positive on Japfa as we believe the recent recovery in both its Indonesian poultry and swine fattening divisions is sustainable.
• A potential benign poultry supply industry could likely keep prices robust for longer and benefit PT Japfa Comfeed.
• Its swine fattening division could also stay profitable as current ASP uptick appears to be due to domestic consumption compared to external influences previously.
• Upgrade from Reduce to ADD with a higher SOP-based Target Price of S$0.80 due to improved forward prospects. This report marks a transfer of analyst coverage.

1H18 – a Bumper Harvest

• Japfa charted a strong turnaround in 1H18 to report a core net profit of US$55.9m (excluding other gains, forex and bio asset revaluation). 2Q18 is typically seasonally strong but Comfeed was buoyed by especially high feed margins and average selling prices (ASP) for day-old chicks (DOC) and broilers.
• Meanwhile, the turnaround in fortunes of its swine fattening business brought the Animal Protein Other (APO) segment back to the black.

Still Time to Ride the Chicken Run

According to our Indonesian poultry analyst, post five culling exercises in FY17 and the ban on antibiotic use in poultry feed in Jan 18, Indonesia’s poultry industry is now facing a supply crunch. DOC/broiler prices hit averages of Rp4.9k/Rp20k in 8M18 and our team believes prices could stay robust (vs. FY17’s average: Rp16.9k) as supply should remain benign for at least the next two years given that the growth cycle of grand-parent stock (GPS) to broiler is 2 years and locals prefer fresh poultry vs. frozen imports.

Vietnam Swine Woes Finally Abate; ASPs Likely Stayed High

According to our Charoen Pokphand Foods analyst (Rating: Add, Target Price: THB27.25), average 2Q18 Vietnam swine prices recovered strongly to VND49.5k/kg, likely on supply shortages after farmers abandoned swine breeding following a plunge in swine prices in FY17 (-38% y-o-y).

Our Vietnam team, in a note on Dabaco Group (Not Rated), also mentioned that the rally in current hog prices could be more sustainable (vs. a temporary hike in Jul 17) as it now seems to be driven by domestic demand.

Keeping Its Milk Cards Closer

We are positive on Japfa’s stake acquisition in AustAsia in Apr 18 (for US$263m in cash and shares), which gave it full control (62% stake previously), despite the raised group debt profile (0.7x in FY17 to 1x in 1H18), as it removes the minority interest (MI) leakage on a business that contributes the healthiest operating profit margins notwithstanding the soft raw milk prices in China.

Upgrade to Add

Given the reasons above, we feel that Japfa’s forward prospects are now on firmer footing. We transfer analyst coverage and introduce FY20F earnings forecasts; we cut our FY18/19F core EPS, with projected FY18/19/20F net profit growth of 179%/15%/5%.

Our new forecasts feature a CY18-20F net profit CAGR of 10.5%. Our SOP-based Target Price of S$0.80 implies 10.6x FY19F P/E; which is still undemanding vs. peers’ average of 11.8x and CY14-17 mean of 12.9x.

Key Risks

Japfa is highly affected by fluctuations in supply and demand of its products, threats of animal-centric diseases, and forex risks due to major revenue and financing streams that are denominated in rupiah, the Vietnamese dong and Chinese renminbi.

Source: CGS-CIMB Research - 10 Sep 2018