CGS-CIMB Research analyst Tay Wee Kuang has upgraded his call on Japfa UD2 to “add” from “reduce” with a higher target price of 28 cents from 20 cents previously.
Tay’s report on Nov 2 comes after Japfa reported a core net profit of US$32.4 million ($44.2 million) for the 3QFY2023 ended Sept 30. The return to profitability stood ahead of Tay’s previous forecasts of a net profit of US$34.8 million in the 2HFY2023.
In the 3QFY2023, Japfa’s gross margins also improved by 4.7 percentage points y-o-y and 4.2 percentage points q-o-q to 16.8%. The margin expansion was attributed to the better average selling prices (ASPs) as well as lower raw material prices of feed ingredients such as soybean meal and corn, says Japfa’s management at its analyst briefing on Nov 1.
“Although Indonesia saw higher domestic corn prices year-to-date (ytd) [as Indonesian feed mills have to source their corn domestically], management shared that in 3QFY2023, Japfa benefitted from the lagged effect of lower domestic corn prices from previous quarters,” says Tay.
“Management also believes Japfa should be able to remain competitive in its poultry feed pricing which should support operating margins for its poultry feed business in Indonesia,” he adds. “Active cost saving initiatives introduced in FY2023 such as a freeze on permanent hires and business travel restrictions highlighted during its 1QFY2023 results briefing also led to lower operating expenses (opex), which translated to a 5.6% percentage point and 5.7% percentage point improvement in ebit margin [on a y-o-y and q-o-q basis] in 3QFY2023.”
Despite the easing ASPs with a decline in Vietnam swine prices quarter-to-date (qtd), Japfa should remain profitable in the 4QFY2023, says Tay. In the 3QFY2023, Japfa recorded better ASPs on a q-o-q across its segments although Vietnam swine prices fell by 12.1% qtd. That said, Japfa’s management has shared that better cost efficiencies should continue to put the company’s Animal Protein Others (APO) segment in the black.
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“Nevertheless, we think APO’s turnaround remains shaky given the uncertain outlook for Vietnam’s economy,” Tay writes.
“Management also shared that Japfa’s streamlining of its swine operations (i.e. reduction of swine breeding stock), which incurred US$13.3 million [in] costs for 9MFY2023, is an ongoing process contingent on Vietnam’s economic outlook and could extend into FY2024 if necessary,” he adds.
To this end, the analyst is upbeat on Japfa’s prospects, seeing that the company could finish FY2023 in the black despite likely margin pressures in the 4QFY2023.
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Tay is now projecting Japfa to report a net profit of US$5.8 million for the FY2023, reversing from his previous forecast of a US$13.9 million net loss.
He is also increasing his earnings per share (EPS) estimates for the FY2024 to FY2025 by 5.5% to 7.0%.
His new target price is pegged to 0.5x Japfa’s FY2024 P/BV or -0.5 standard deviations (s.d.) from its 10-year average. This is compared to a trough valuation of 0.35x previously as the analyst believes that Japfa’s share price should see a re-rating after a few straight quarters of profit.
Further to his report, Tay sees potential re-rating catalysts in the form of a strong season ahead of Vietnam’s Tet festivities as well as buoyant consumer sentiment ahead of Indonesia’s general elections in 2024.
On the flipside, downside risks include a return to quarterly losses, loss of price competitiveness for its animal feed products and a negative translation effect from appreciation of the US dollar (USD) against the Indonesian rupiah (IDR) and, or Vietnamese dong (VND).
As at 10.35am, shares in Japfa are trading 1 cent higher or 4.76% up at 22 cents.
