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P H
Mar 07,2017 09:21:00

Japfa Comfeed Indonesia ($JPFA) - Weaker Growth Outlook

We lower our earnings estimates and downgrade Japfa to NEUTRAL (from Buy) with a lower TP of IDR1,750 (from IDR2,700, 3% upside). The downgrade reflects several margin limitations at its key business segments, imposed by the Government since Nov 2016, which have prematurely halted its margin expansion cycle. In addition, we do not see any major upside catalysts at this juncture. As expected, Japfa closed 2016 with a decent set of results, with EPS up sharply by 4.4x YoY.

Margin expansion limited by government intervention, including the announcement to cap day-old chick (DOC) prices at IDR4,800/bird (implemented in West Java so far) and broiler prices at IDR18,000/kg, when DOC was trading at close to IDR6,000/bird during Oct 2016. In addition, corn imports by feed millers are banned – with feed millers arguing over insufficient domestic corn supply, we believe this may increase feed production costs.

Favourable supply/demand dynamics and improved capital structure should support earnings. Notwithstanding the above, Japfa Comfeed Indonesia's (Japfa) earnings should be insulated by stable broiler/DOC prices on better supply/demand dynamics, after the implementation of the culling programme and limited parent stocks import since 2014. Furthermore, Japfa's interest expenses for 2017F should decline by 30% due to its USD bond buyback and debt refinancing last year. Japfa is also looking to raise feed prices if feed costs escalate, given supportive broiler prices.

Downgrade to NEUTRAL on weaker growth prospects. We lower our 2017- 2018F core profit estimates by 11-19.3% to account for flat YoY DOC and broiler gross margins, and 2% reduction in feed gross margins. This translates to a lower DCF-derived TP of IDR1,700, which implies 2017F P/E of 11x, -1SD vs 5-year historical mean. Main upside risk is an implementation shortfall of the regulations. downside risks are IDR depreciation and margins compression.

DOC still strong but lower feed margins. On QoQ basis, the DOC segment still delivered a high EBIT margin of 22%. However, the feed segment’s 4Q16 EBIT margins of 11% was the lowest in 2016 (Figure 2).

$CPIN $JPFA $MAIN $SIPD

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P H
Dec 14,2016 15:22:38

Poultry: Imports from 7 countries stopped

Quarantine Agency of Ministry of Agriculture banned imports of poultry and fresh poultry products from countries affected by avian influenza. The countries are Romania, Japan, Netherlands, France, Finland, India and Sweden. (Kontan)

$CPIN $JPFA $MAIN $SIPD

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P H
Dec 05,2016 09:59:19

Indonesia Poultry: Dollar concerns
 
Poultry: Indonesia
 
Currency sensitivity: 1% IDR depreciation = -5.6% earnings decline

Due to the strong dollar, we downgrade the poultry sector from Neutral to UNDERWEIGHT as we look for the continued strong dollar to undermine sentiment, despite expected strong 4Q16 results. This is particularly true as the Fed is expected to increase interest rates at its next few meetings. Our currency sensitivity analysis suggests that, for every 1% IDR depreciation, weighted-average sector earnings would decline by 5.6%, with the most sensitive to IDR currency movement being JPFA (-6.7%), followed by CPIN (-5.2%) and MAIN (-5.0%) (exhibit 12). Most sensitive within the poultry sector would be JPFA due to its high 9M16 USD debt amounting to USD212mn, around 54% of its total borrowings.

Pro-grass roots government rulings to hurt large poultry players

In addition to the new government regulation on monitoring DOC supply and demand signed by the Ministry of Agriculture in May 2016, the government is proposing a regulation that requires large poultry players to build a slaughterhouse for every 500k of weekly broiler production capacity and sell more than half of their DOC production to independent farmers at suggested fair prices. Note that companies under our coverage have only 10-12% of total broiler production that is sold internally. CPIN uses all of its internal farm production for its processed food segment, CP Food. JPFA also only utilizes 10% of its total 550mn annual DOC production capacity internally. This is equal to just 1mn weekly of on-farm broiler production, translating into just 2 slaughterhouses as per the regulation, while JPFA already has 9 slaughterhouses operating. Based on preliminary information about the new regulation, all the companies under our coverage have met the necessary requirement. We think the only overhang is the suggested DOC price cap, which should be negative for large poultry players as government plans to set the DOC price cap to protect small broiler farmers.

4Q16 earnings preview: Strong results for exit mechanism
In October and November 2016, we are seeing another anomalous quarter, with DOC and broiler prices continuing to strengthen. Based on our channel checks, there are some indications of DOC undersupply in various areas. DOC and broiler prices in October and November saw another anomaly of high DOC and broiler prices (4Q16 DOC: +19.2% q-q; broiler: +6.3%) (exhibit 4). That said, we should see another solid quarter for poultry stocks with high DOC and broiler margins, although there may be some margin contraction for feed, as domestic corn prices spiked to the IDR4,500/kg level (vs. imported corn price: IDR3,000/kg). Thus, investors concerned about negative sector sentiment following the recent dollar trend could use the expected strong earnings results to exit the sector.

Earnings reductions, with CPIN least preferred, JPFA most preferred
Given our weaker USD:IDR assumption for 2017, we lower our 2016-18 earnings forecasts for the three poultry stocks under our coverage by about 1-11% (exhibits 9-11). We maintain our HOLD rating and target 17x 2017F PER for CPIN with a lower 12M TP of IDR3,400, making it the least preferred in our coverage group. For JPFA and MAIN, we retain our BUY ratings and target 2017F PERs of 15x, with lower TPs of IDR2,400 (JPFA) and IDR2,000 (MAIN) (exhibit 2). Our latest sensitivity analysis suggests that JPFA is the most sensitive to broiler prices given that it has the highest broiler revenue contribution compared to the others (+27% net profit for every +5% in broiler price). Although JPFA is the highest USD-leveraged stock, it remains our top pick as we are still of the view that broiler prices should remain stable until 1H17 before experiencing some weakness post-Lebaran in 2H17. Additionally, as domestic corn prices have risen another 5-7% to IDR4,500/kg in 4Q16, we think JPFA will be most immune due to as it has the lowest revenue contribution from animal feed relative to its two listed poultry competitors. Risks to our calls: Sooner-than-expected DOC and broiler price corrections and IDR depreciation against the USD.

$CPIN $JPFA $MAIN $SIPD

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P H
Nov 29,2016 10:17:36

Poultry: New rule to stop monopoly

On top of the new government regulation signed in May 2016, the government is proposing another rule to dismantle the domination of large poultry corporations. These companies will be required to sell at least half of their DOC (day-old chicks) to independent farmers at a fair price and they will have to run a slaughter house for every 500k broilers of their weekly production capacity. In this way, they can slaughter at least 30% of the live birds and store them in cold storage. The new arrangement is pending for approval from the agriculture minister. (Jakarta post).

Bahana comment: This is a huge step-back for the poultry stocks under our coverage, however, there are still a lot of gray areas in terms of implementing the new rule.

$CPIN $JPFA $MAIN $SIPD

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P H
Sep 29,2016 20:53:00

Indonesia Poultry: 3Q16 results preview: Strong DOC & broiler ASPs; Weak feed margins
Poultry: Indonesia

Unusually strong chicken ASPs helped by culling & lower import quotas

For the poultry sector, post-Lebaran period this year has been unusually strong (exhibit 4) with the July-August 2016 DOC ASP at around IDR4,911/DOC (+3.1% from 2Q16 average), and the broiler ASP at IDR17,356/kg (-0.6% from 2Q16 average). DOC and broiler prices have remained relatively robust despite the historical trend of DOC and broiler prices falling 10-25% post Lebaran. In our view, price support is due to the 3mn parent stock (PS) culling (reducing about 15% of the nation’s DOC supply) and lower import quotas, which reduced grandparent stock (GPS) in 2015 by 45k to 665k, down 6.3% y-y. With DOC oversupply conditions being close to be eliminated, we believe 3Q16 DOC and broiler margins should remain well supported, although we may see some q-q sales volume contractions, mainly due to Idul Adha, a religious festivity causing higher consumption of beef and lamb.

2Q16 soybean meal ASP +40% q-q = Feed margin contraction

With the 40% q-q rise in 2Q16 soybean meal prices, a stable 3Q16 feed ASP is likely to result in a feed margin contraction, particularly given that soybean meal accounts for some 25% of COGS. On a more positive note, poultry players are requesting a 3% hike in the feed ASP to the Association (GPMT), which we believe is likely to be granted in October 2016.

Corn-price decoupling post import restrictions
At this stage, the government is targeting zero percent corn imports in 2017 by allocating 1mn ha of new land for corn, as well as machinery and price controls. The 7M16 corn imports fell 60% y-y, in line with government efforts to protect local farmers. This has led to undersupply conditions for the domestic corn market, evidenced by the decoupling of local corn prices vs. the global indicator price (local: IDR4,000/kg vs. imported: IDR3,200/kg). Earlier this month, the Indonesian Trade Ministry announced minimum and maximum reference prices, including corn, which are to be valid for four months and reviewed periodically thereafter. We believe poultry players will not benefit from stocking up during big harvests, when corn prices are at their lowest (i.e., possible drop to IDR2,000/kg).

Top pick pre-3Q16 results season: JPFA on high poultry prices

We expect JPFA to post the strongest earnings in the sector due to high poultry prices. JPFA has the highest contribution to sales from the DOC & broiler divisions (1H16: 45% vs. CPIN: 28% and MAIN: 27%). Thus, we raise JPFA’s 2016-18F earnings (exhibits 9-11), particularly on our stronger IDR outlook. We expect JPFA to see leverage improvement and synergies due to the recent KKR investment, and look for JPFA to trade close to MAIN’s valuation. We cut CPIN from Buy to HOLD with a lower 12M TP of IDR3,400, based on a lower 2017F PER of 17x (from a 20.4x 2016F PER) mainly on the consolidation of the broiler divisions, which should cause earnings volatility. Thus, we believe JPFA and MAIN deserve valuation discounts to CPIN, with JPFA’s new TP higher at IDR2,000 and MAIN’s lower at IDR2,300, both based on a 15x 2017F PER. Risks to our calls: DOC and broiler price drops and a weaker IDR.

$CPIN $JPFA $SIPD $MAIN

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SIPD
715.00 5.00 (0.83%)
Sierad Produce Tbk.
Last Update 10:39:57