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