DBS Group Research 2015-07-02: Japfa Ltd - HOLD call maintained with lower TP of S$0.46

Light at the end of the tunnel? 

  • FY15F/16F earnings cut by 29%/37% on reduced broiler/DOC ASP; cuts in volume 
  • Expect weaker y-o-y Indonesia contribution in 2H15 on oversupply concerns; but proposed cut among industry players is a first step in tackling DOC oversupply 
  • Impact from breeding losses is diminishing, given low base, but other segments’ contributions are growing 
  • HOLD call maintained with lower TP of S$0.46. 

Cutting forecasts. 

  • We made further cuts to FY15F/16F earnings by 29% and 37%, on lowered expectations for both live broiler and day-old chick (DOC) prices YTD. 
  • We cut FY15F/16F broiler ASP by 4%/8% to Rp14,790/Rp15,000 per kg, and cut FY15F/16F DOC ASP by 12%/16% to Rp3,958/Rp4,015 per bird. 
  • We also tempered our expectations on FY16F sales volumes for both broilers (-2%) and DOC (-2%), mainly to reflect early retirement of parent stock (PS) since late last year and culling on unhatched eggs (industry-wide) YTD. 
  • While FY15F capex was unchanged at US$192m, we lowered FY16F capex by 21% to US$210m to conserve cash. 

Diminishing y-o-y impact from JPFA. 

  • These revisions cut JPFA’s FY15F/16F EBITDA by 12%/24%. 
  • Our previous forecasts had assumed that the industry had started culling their PS early this year – which should have resulted in higher ASP. This did not happen, while the Rupiah and purchasing power continued to weaken YTD. 
  • The impact is less significant on y-o-y basis as it was already coming from a loss, while China Dairy's contribution continues growing. 
  • A 23% cut in Parent Stock (PS) could boost profits. 
  • According to Tempo (a weekly magazine), Indonesia’s poultry players had in Jun-15 agreed to cut 8m PS – representing c.23% of total population – post post-Lebaran in an effort to stem the precipitous drop in DOC prices. 
  • While there remains a debate as to which players should undertake a bigger share of the cut, the resultant impact could well tackle the oversupply situation and boost prices through next year. But uncertainties still linger with regards to weakening purchasing power, which may necessitate a deeper cut. 
  • Based on preliminary sensitivity, a 23% cut on Japfa’s PS would lift Japfa Limited’s FY15F/16F earnings by 33%/19% on the assumption that DOC and broiler ASP would recover by 5% y-o-y (i.e. still less than inflation). 

HOLD call maintained. 

  • Employing SOP methodology, our TP is cut to S$0.46 – implying c.15% upside. 
  • We imputed a steep DOC price drop post-Lebaran – though less severe than 2014, given ongoing industry-wide 30% cut in hatched eggs YTD. 
  • Upside catalyst will be triggered if proposed 23% cut in PS industry-wide is implemented.


Source: http://www.dbsvickers.com/