DBS Group Research and CGS International (CGSI) analysts are keeping their "buy" and "add" calls on Japfa UD2 following the company’s 1HFY2024 ended June results release.
For its 1HFY2024, Japfa’s revenue came in at US$2.3 billion ($3.08 billion), up 6% y-o-y. Earnings were US$52 million, reversing from the US$54 million loss last year — this equates to about 80% of DBS’s FY2024 projections.
Japfa’s revenue for its Indonesia subsidiary grew 7% y-o-y, while also registering 3% growth in its animal protein - others (APO) business, largely from Vietnam.
For its 2QFY2024, earnings more than tripled to US$39 million from US$12 million in the preceding quarter. This is due to positive industry dynamics in both Indonesia and Vietnam, as well as lower material costs.
Indonesia and Vietnam saw higher prices of poultry and swine respectively, which was attributed largely to supply-led factors. DBS notes that in Indonesia, the positive supply dynamic seems to be supported by voluntary culling by industry players and individual farmers, who were wary of over breeding broilers post-Lebaran given experiences of losses in the past.
“Management shared that smaller breeders tend to be opportunistic and could return to the market, adding to higher unpredictability and volatility in broiler prices. With a short 30 to 40 days breeding cycle, the farmers who missed out may start entering the market,” the analysts point out.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
In Vietnam, Japfa’s focus on biosecurity ensured its swine supply remained stable amidst ongoing Asian Swine Flu (ASF), which had a disproportionate adverse impact on the supply of its competitors, especially the smaller farmers. With a much longer six months fattening period for swine, the company highlighted that it would be more challenging for individual and small-scale farmers to take advantage of the current higher swine prices, the analysts say.
That said, DBS reiterates that Japfa’s 1HFY2024 revenue and earnings were ahead of their expectations. The company’s twin engines of growth — Indonesia and Vietnam — continue to rev up, delivering a strong 2QFY2024. The analysts has kept their target price at 45 cents.
Meanwhile, CGSI analyst Tay Wee Kuang has increased his target price to 43 cents from 37 cents previously. Tay notes that CGSI was previously cautious of Japfa teethering between profit and losses across quarters given the volatile average selling prices (ASPs). However, the analyst now thinks that the decline in raw material prices should support sustained profitability for FY2024.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
On better earnings visibility, Tay has raised his EPS estimates on Japfa for FY2024/FY2025/FY2026 by 282.8%/104.9%/97.6% from a low base.
Given uncertainties ahead in Indonesia due to the unpredictable supply dynamics and recent broiler price drop to IDR16,000 to IDR17,000 per kg, DBS has maintained its current earnings outlook. However, the analysts do see potential upside should broiler prices reverse its current trend during the 2HFY2024 period, along with higher feed margins on the back of retreating raw material prices.
“We are more optimistic on Vietnam given the longer time frame for swine breeding. Accordingly, we see higher odds of outperformance coming from Vietnam which should offset potentially slower h-o-h in Indonesia, if any, after a strong 1HFY2024. As such, we are keeping our overall earnings estimates unchanged,” the analysts note.
As at 10.29am, shares in Japfa are trading 2 cents lower or 6% down at 31.5 cents.
