DBS Group Research analysts Chee Zheng Feng and Andy Sim have increased their estimates for Japfa UD2 after the vertically-integrated animal protein player reported patmi of US$87.5 million ($115.1 million) for the 9MFY2024 ended Sept 30, turning around from a loss of US$22.7 million. Japfa’s core patmi for the 3QFY2024 stood at US$36 million, 20% higher y-o-y.
The analysts are keeping their “buy” call as they see more room for earnings growth before its peak.
“We believe 4QFY2024 would likely be another strong quarter, driven by Indonesia and Vietnam,” they write in their Oct 30 report, adding that Japfa’s business in Vietnam is likely to continue reporting steady profits in FY2025 due to supply constraints from the ongoing outbreak of the Asian swine flu.
With this, Chee and Sim have upped their earnings estimates for FY2024 and FY2025 by 45% and 27% to US$120 million and US$139 million respectively, thanks to strong margin expansion from falling raw material prices, cost discipline and muted competition.
“We believe the company could continue to benefit from elevated swine prices given the significant time of two to three years required for competitors to scale up supply,” note the analysts. “In addition, Indonesia should continue to perform well with broiler prices holding above breakeven level, coupled with potential tailwind from the implementation of the free lunch programme initiated by Indonesia’s new president, Prabowo Subitano.”
Chee and Sim have also increased their target price to 56 cents from 49 cents previously on higher valuations for Japfa Comfeed and its “animal protein – other” business segment. The analysts have raised their earnings projects for both segments and applied a 35% discount for Japfa’s holding company (holdco). Their new target price translates to an FY2024 P/B of 1 time.
However, with majority of the earnings growth this year driven by cost factors such as lower raw material prices, the analysts see a sharp or prolonged spike in raw material prices as a “key risk”. That said, they see that Japfa may have “taken advantage” of the lower corn prices by stocking up, a move which should support the company’s strong margins going into FY2025.
Shares in Japfa closed 0.5 cents lower or 1.28% down at 38.5 cents on Nov 4.
