Tay Wee Kuang of CGS International has maintained his "add" call along with a higher target price of 37 cents from 26 cents for Japfa UD2 , following much-improved earnings for its 1QFY2024.
Revenue for the three months ended March increased by 11.6% y-o-y to US$1.1 billion on better selling prices. From a loss of US$37.9 million, Japfa reported a core net profit of US$13.4 million, thanks to lower costs.
According to Tay in his May 6 note, apart from better selling prices, prices of key feed ingredients, such as soybean meal and corn have eased to their lowest levels since Jan 2022, when the war between Russia and Ukraine broke out.
Even in Indonesia, where feed millers have to source the supply of corn locally, domestic corn prices decreased to Rp4,500/kg as of April 26, notes Tay.
"As such, we believe that Japfa’s margin profile could improve in subsequent quarters," he adds.
Tay, citing the management, notes that the company has "recalibrated" its growth plans in Vietnam last year where it farms pigs, because of the weak consumer sentiment.
Now, with sustainable selling prices observed in 1QFY2024, Tay sees the company beefing up its production volume in this segment.
With overall improved market dynamics, Tay has raised his FY2024, FY2025 and FY2026 earnings estimates by 94.9% and 34.3% and 30.8% respectively.
Based on his previous forecast, Tay was expecting losses.
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His higher target price of 37 cents is pegged to 0.7x FY2025 P/BV, which is 0.5 s.d. above the 10-year mean.
The earlier price target of 26 cents was based on 0.5x FY2025 P/BV, which is 0.5 s.d. below the 10-year mean.
"We view the improvement in ASPs and lower raw material prices as tailwinds supporting sustainable profitability in the upcoming quarters that should re-rate the stock," says Tay.
