DBS Group Research is downgrading its call on Japfa to “hold” from “buy” with a lower target price of 67 cents from 89 cents previously.
Despite its cheap valuation, analyst Cheria Christi Widjaja expects near term outlook to remain subdued and margin pressure may linger in 2022, as raw material and logistics costs stay elevated.
According to the analyst, the group’s swine operation in Vietnam is expected to remain weak, dragged by softer swine prices due to the lingering impact of the Covid-19 pandemic and the resurgence of African Swine Fever (ASF) during 4Q2021.
This is then expected to negatively impact Japfa’s overall margin in 4QFY2021 and FY2022. Hence, the analyst expects a soft 4QFY2021 performance and for earnings recovery to by not as fast as previously expected.
Widjaja has cut Japfa’s FY2021 earnings forecast by 28% and FY2022 by 27%, to incorporate the group’s weak 3QFY2021 performance and a more conservative outlook on the margin for 4QFY2021 and FY2022.
The analyst notes that Japfa’s share price has corrected about 10% since the 3QFY2021 announcement, which she believes that the share price has already priced in the potential slow earnings recovery in 4QFY2021 and FY2022.
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“While Japfa’s valuation is relatively cheap versus peers and currently trades at undemanding valuation, we prefer to wait for better signs of recovery in Vietnam’s swine operation and Japfa’s overall margin,” says Widjaja. Japfa currently trades at about 7x P/E, which is around its four-year historical mean, and lower compared to regional peers average of 1.5x FY2022 P/E.
On the bright side, broiler prices in Indonesia have started to improve since 4Q2021, driven by increasing chicken demand following reopening and the continuous culling programme. Meanwhile, raw milk prices in China still stay at a favourable level.
“Hopefully, these, could minimise the impact of Vietnam’s lower swine prices on Japfa’s overall earnings,” says Widjaja, who expects Japfa’s Indonesian animal protein segment to turn profitable in 4QFY2021, after reporting a net loss in 3QFY2021.
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However, domestic corn prices remained high in 4QFY2021; therefore, margin contraction would still be apparent, although the impact of this on overall earnings would not be as bad as during 3QFY2021, given higher day-old-chicks (DOC) and broiler selling prices, according to the analyst.
In FY2022, Widjaja expects DOC and broiler prices to be more stable, as she assumes that the government will not impose any further full lockdowns in Indonesia throughout 2022. She also projects higher broiler prices in FY2022, driven by an increase in chicken demand, especially from the hotel, restaurant, and catering (HoReCa) sector following reopening, as well as the government’s intervention through its culling programme, which she expects will continue at least during 1H2022.
As at 3.30pm, shares in Japfa are trading at 59 cents or 7.7 times FY2021 earnings with a dividend yield of 1.6%.
