UOB Kay Hian (UOBKH) is keeping its “hold” recommendation on Japfa with a target price of 63 cents, following its recent 1HFY2022 ended June results announcement, which saw earnings came in 63% lower y-o-y at US$44.0 million ($60.8 million).
This was on the back of a 10% increase in revenue to US$2.5 billion, mainly driven by high poultry prices, and a 20% increase in cost of sales to US$2.1 billion. The higher increase in cost of sales was primarily due to higher costs for its farming operations, which eventually led to the drop in earnings.
While 1HFY2022 results came in rather lacklustre, the results were in line with UOBKH analyst John Cheong’s estimates. Core Patmi for the first half period came in 54% lower y-o-y at US$54 million, in-line with Cheong’s expectations, forming 52% of his full-year forecast.
He notes that the core Patmi weakened as higher feed raw material costs across all segments and African Swine Fever (ASF) in Vietnam challenged operations and tightened profitability.
Meanwhile, Japfa TBK, Japfa’s Indonesian business, declined marginally q-o-q but showed slight improvement in its Animal Protein – Other (APO) segment. In 2QFY2022, Japfa TBK reported core Patmi of US$18 million (-25% y-o-y/-20% q-o-q).
“Although Indonesia’s poultry average selling prices (ASPs) have increased, profitability still remains under pressure as high feed raw material costs resulted in increased production costs across the vertically integrated operations,” notes Cheong.
On the other hand, losses from the APO segment narrowed from a US$11 million loss in 1QFY2022 to a US$2 million loss in 2QFY2022 due to higher sales volume of poultry and recovery of poultry prices, but the swine business remains weak due to resurgence of ASF since 4QFY2021, with swine ASPs depressed by pre-emptive sales in the market.
Over in China, dairy revenue rose 14% y-o-y for 1HFY2022, driven by higher raw milk sales volumes, with the additional contribution from Farm 8 and the two recently-acquired farms in Shandong.
However, core Patmi for the dairy segment fell 49% y-o-y to US$22 million due to high feed costs, which resulted in increased production costs for both dairy and beef operations.
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Overall, Cheong sees uncertainties in all of Japfa’s segments due to higher costs of raw materials and volatile ASPs.
For instance, in Vietnam, swine prices in 2022 and 2021 were lower compared to 2020 when the prices were exceptionally high due to supply shortage caused by ASF.
In addition, disruptions in global logistics translated into higher costs of raw materials which has led to high feed raw costs and resulted in increased production costs which may not be quickly passed on to the end-consumers.
As at 12.25pm, shares in Japfa are trading 2.5% higher at 61 cents.
