March 14, 2019

At current valuations, we believe the market has priced in weaker Vietnam swine profits, mainly attributable to the potential impact of ASF outbreak in Vietnam. Share price could re-rate till 3Q19F on sustained Indonesia poultry margins ahead of the Lebaran season and the continual day old chick (DOC) supply shortage. However, in the longer term, potentially narrower yoy growth for JAP’s poultry business towards FY20F and largerthan-expected disruption in the Vietnam swine business could be risk factors, in our view. As such, we believe the stock could retrace to 0.5 s.d. below average mean levels.

According to the PigProgress website as at 11 Mar, the outbreak of African Swine Fever in the north of Vietnam is spreading at a rapid pace, with the number of infected communities rising to 79. Based on the ongoing ASF outbreak in China since Aug 18, we believe industrialised farmers (like JAP) may stand a better chance but there are no guarantees they will not be affected. A silver lining is that swine prices may at least be maintained as the supply dwindles. However, if there is a shift in consumption to other proteins, the demand for JAP’s swine could also decline. JAP said it could see higher costs due to enhanced biosecurity measures and lower swine feed sales volumes. We conservatively forecast JAP’s Vietnam FY19F EBIT to shrink by 47.3% yoy as we assume lower margins of 4.4% (vs. CY18: 8.0%).

Our Indonesian analyst foresees DOC prices rising in FY19F in Indonesia, and broiler price staying weak in Feb 19 before eventually inching up in Mar 19. These are near-term catalysts for PT Japfa Tbk’s business (at least till 3Q19F). But supply/demand could stabilise towards CY20F as the DOCs imported in CY18 hit the market. Local Indonesia corn prices also rose at end-CY18, which could stifle further growth in feed margins. All in, margins could moderate in the medium term.

We lower our FY19-20F EPS by 1.4-5.9% due to lower expectations for the Vietnam swine business and moderation in Indonesia poultry margins. Potential catalysts/risks include: i) sustained/lower margins for Indonesia poultry; ii) lower/higher-than-expected losses in Vietnam swine business; and iii) higher/lower profits from the dairy business. Downgrade the stock to Reduce with a lower SOP-based TP of S$0.63/share. – CGS CIMB

Japfa Ltd closed at: S$0.66