CGS International is keeping its “add” call and target price of 37 cents unchanged on Japfa UD2 as the agrifood company returned to the black in its 1QFY2024 results, as its average sales prices (ASPs) trended positively heading into the festive season in Lebaran, Indonesia and Tet, Vietnam.
Analyst Tay Wee Kuang writes in his June 6 note: “Japfa disclosed in its monthly update that average monthly broiler and day-old chick prices in Indonesia were up 6.2% and 30.6% q-o-q as of May 24, while swine prices in Vietnam were up 13.6% q-o-q (Fig 3), according to Vietnam feed company, Anova Feed.”
Tay highlights that the quarter-to-date ASPs are comparable to 3QFY2023, where the company reported an earnings before interest and taxes (ebit) of US$87.9 million ($118.2 million) for its Indonesian operations and US$10.4 million for its Animal Protein Others (APO) segment.
Meanwhile, based on Tay’s estimates, prices of soybean meal and corn, which form 70% to 80% of Japfa’s animal feed, have also eased due to abundance. Global soybean meal prices have declined 23.7% year-to-date, while global corn prices have retreated by 33.1% year-to-date.
In Indonesia, domestic corn prices have also declined 17.2% q-o-q to an average of 4,500 IDR (37 cents) per kilogram.
“As such, we believe that Japfa’s margins should improve q-o-q, with APO likely to return to profitability after experiencing quarterly losses since 3QFY2021, except for in 3QFY2023, when reported core net profit was a modest US$1.7 million,” writes the analyst.
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Tay has also looked to the El-Nino weather event as a favourable factor, where higher temperatures in 2HFY2023 should translate into cooler weather in the Southeast Asia region from June to August.
He continues: “This should support crop yields, leading to lower raw material prices for Japfa. Nevertheless, the return of La-Nina could result in unfavourable weather conditions, such as floods and hurricanes within the region.”
Tay’s target price is pegged to seven times FY2024 price-to-book value (P/BV) at 0.5 standard deviation (s.d.) above the five-year historical mean, as he thinks “there could be a re-rating following potential earnings beat in 2QFY2024”.
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Re-rating catalysts noted by the analyst include improved consumer sentiment and sustained ASPs in the 2HFY2024, while downside risks include the danger of an outbreak of African Swine Fever (ASF) within Japfa’s facilities, which would result in one-off losses and margin compression from rising raw material prices.
As at 3.30 pm, shares in Japfa are trading flat at 32 cents.
