CGS-CIMB Research analyst Tay Wee Kuang has maintained his “add” call on Japfa, anticipating improved profitability as average selling prices (ASPs) recover and raw material prices peak.
In his Sept 1 note, Tay says Japfa is expected to benefit from a continued recovery in demand for various animal proteins — especially given that the key Asean economies that it operates in are expected to see healthy GDP growth above 5% in 2022.
“ASPs have also improved to healthier levels that should stave off ongoing cost pressures from high raw material prices for key animal feed ingredients,” he adds.
CGS-CIMB’s sum-of-parts based target price of 81 cents is unchanged although it is cognisant of the six-month validity of the listing application for its China dairy subsidiary AustAsia Investment Holdings on the HKEX, which will expire on Sept 29 and needs to be renewed.
Tay highlights that in the latest data provided by Japfa, prices of broiler and day old chics (DOCs) in Indonesia remained resilient in July following a seasonally weaker 2QFY2022 due to lower demand post-Lebaran in Indonesia. This dispels CGS-CIMB’s concerns over the weak DOC prices in May, which could have impacted future broiler prices.
“Although prices of soybean meal, a key feed ingredient, is back to an all-time high, we think that profitability for Japfa’s Indonesia poultry business should remain intact with better ASPs and similar cost base compared to 1QFY2022, the previous high for raw material prices,” says Tay.
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The recovery of Japfa’s animal protein — others (APO) has been a drag on earnings as the resurgence of African Swine Fever in Vietnam in late 4QFY2021, leading to weak swine prices that extended into 2QFY2022. This exacerbated the impact of cost inflation from higher feed and biosecurity costs.
However, swine prices have rebounded in 3QFY2022, with a quarter-to-date ASP of VND67,000/kg, supportive of a turnaround in profitability in 2HFY2022 which should also benefit Japfa as one of the most cost-efficient farmers in the industry.
Meanwhile, for its China dairy business, the resilient raw milk prices at above RMB4.10/kg, along with higher sales volume in 1HFY2022 from better milk yields as well as larger dairy herd population helped to partially offset the impact of rising costs of feed ingredients such as alfalfa.
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“Nevertheless, further rises to alfalfa costs could wear down the resilience of the China dairy business,” says Tay.
As at 1.41pm, shares in Japfa are trading flat at 59 cents.
