Company Update:
Japfa Comfeed (JPFA IJ, BUY, TP: IDR2,700),
The Upcycle Continues
Japfa Comfeed (JPFA IJ, BUY, TP: IDR2,700),
The Upcycle Continues
The poultry sector’s margins expansion
upcycle is faster than our expectation. We remain upbeat on Japfa as:
1. Its share price rally is backed by
ultra-high profit growth, while its valuation looks undemanding after its 3Q16
results;
2. It is the biggest beneficiary of
stable DOC and broiler prices and the IDR strengthening in the sector;
3. It received a better credit rating to
refinance its debt, which would lower interest costs.
We
increase our FY16F-17F net profits by 51-42% respectively and reiterate the BUY
call with a higher DCF-based IDR2,700 TP (from IDR1,150, 50% upside) pegged to
15.6-13.8x FY16F-17F P/Es.
¨
Day-old
chicks (DOC)/broiler volume growth and margins recovery accelerate. Japfa Comfeed
Indonesia’s (Japfa) 9M16 earnings of IDR1.72trn was at 136%/130% of
our/consensus estimates due to higher-than-expected DOC and commercial farm
margins and a one-off gain of IDR261bn from the sale of its Australia feedlot.
The DOC segment’s operating margin of 22.3%was close to the sector’s peak
margins of 25-30% in FY12.
¨
Apart
from higher prices, DOC production has declined to about IDR4,200/bird
vis-à-vis Oct 2015’s IDR4,500-4,700/bird after its parent stocks’ culling. Its
commercial farm achieved a record high operating margin of 7.4%.
¨
Sector
recovery is apparent.
The supply/demand rebalancing of broiler chickens and DOCs continues to play
out. On a YoY basis, September broiler and DOC prices were about 25-30% higher,
ie holding steadily at IDR18,000/kg and IDR5,500/bird despite the low season.
We believe this trend of gradually improving prices may continue into
4Q16-FY17F.
¨
Good
timing for debt refinancing.Japfa recently launched a new bond programme
of up to IDR3trn to refinance IDR1.5trn in old bonds, which are due in Jan
2017. The new bond would have a lower coupon rate as Indonesia’s rating agency
PT Pemeringkat Efek Indonesia(PEFINDO) has upgraded Japfa’s rating to A from
BBB.
¨
Valuation
looks undemanding despite a year-long rally. We note that Japfa’s
share price has increased by 183.5% this year, and estimate that its full-year
net profit may quadruple (its core profit may increase almost threefold). Its
current valuation of 10.8x FY16F P/E is still undemanding – the counter usually
trades at a 15x P/E average toits 5-year historical band.
¨ Reiterate BUY with a higher TP of IDR2,700. On the back of improving DOC/broiler prices and a stable, strengthening IDR, Japfa should benefit greatly due to its high debt and exposure to DOC/commercial farms. Key risks are unforeseen IDR volatility and government intervention should prices/margins escalate too rapidly
¨ Reiterate BUY with a higher TP of IDR2,700. On the back of improving DOC/broiler prices and a stable, strengthening IDR, Japfa should benefit greatly due to its high debt and exposure to DOC/commercial farms. Key risks are unforeseen IDR volatility and government intervention should prices/margins escalate too rapidly
Kindly click the following link for the full report: Japfa Comfeed Indonesia : The Upcycle Continues
Best regards,
Norman Choong, CFA
Assistant Vice
President
Research Analyst – Utilities,
Oil & Gas, Poultry
PT. RHB Securities
Indonesia
