CGS-CIMB Research is keeping its “add” recommendation on Japfa with a target price of 81 cents, as analyst Tay Wee Kuang expects earnings pressure to ease in the near term amid consumption recovery.
“We believe that in tandem with the more extensive economic reopening in Indonesia and Vietnam, JAP’s key operating regions for animal proteins, consumption patterns have improved in the second quarter, especially given the stable broiler prices in Indonesia, and swine prices in Vietnam after an early Lebaran and Tet, respectively,” says Tay, referring to the two major holidays in Indonesia and Vietnam.
However, the analyst notices some weakness for prices of day-old chicks (DOCs) coming off the Lebaran festivities in Indonesia which could affect broiler prices in 3QFY2022 ending September.
In China, prices of raw milk have gradually trended downwards, but consumption is likely to remain resilient despite lockdowns in cities such as Shanghai and Beijing as dairy product is considered a consumer staple.
The analyst also thinks that the stabilising prices for the group’s raw feed materials, such as soybean meal and corn, also suggests better cost pass-through that would help alleviate some of the pressure on its profitability over the past three quarters.
Meanwhile, Japfa could potentially see an uptake in business exporting poultry to Singapore as Malaysia implemented a poultry export ban and only recently lifted the ban but is reducing imports to one-third of Singapore’s monthly imports.
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Singapore has since entered talks with the Indonesian authorities to explore options to import chicken from Indonesia.
In a media interview with a local Mandarin newspaper, Japfa’s CEO Tan Yong Nang disclosed that he had have talks with Singapore authorities in the past for Japfa to export chicken to Singapore without success, but Malaysia’s current poultry export ban could hopefully help push discussions through.
Singapore’s monthly shortage of chicken supply as a result of Malaysia’s export ban is equivalent to about 7% of the group’s average monthly production volume in FY2021.
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“We think that as Japfa is the second-largest poultry producer in Indonesia, it could be a key beneficiary if the Singapore Food Agency (SFA) strikes a deal with the Indonesian government to export broilers to Singapore. Being a large industrial player, Japfa has the capability to increase its capacity to meet the demand requirements, while also benefitting from the economies of scale to provide cost efficient poultry options to Singapore, in our view,” says Tay.
Overall, the analyst believes that there is an underlying recovery in consumption patterns that will be supported by stabilising prices. Japfa had also shared plans to strengthen its capabilities by resuming expansionary capex that will allow it to grow its presence across its operating markets.
As at 12.10pm, shares in Japfa are trading flat at 57 cents or 8.7x FY2022 P/E with a dividend yield of 3.6%.
Photo: Samuel Isaac Chua/ The Edge Singapore
