PT Japfa Comfeed Indonesia Tbk (JPFA IJ)
Animal Feed, Breeds, and Agri-Food Manufacturer
Remain Cautious on Soft Demand and Flat ASP
Key Financial Highlighted: 1Q20 is still in-line
For 1Q20, JPFA IJ posted a revenue of IDR9.08 tn (+6.01% YoY; -5.07% QoQ) mostly in line with consensus and MNCS estimate, representing 24.64%/25.91% of FY20E, respectively. Revenue increased contributed mainly by higher poultry feed and aqua feed sales volumes. Gross margin improved to 17.54% (+92bps), supported by better raw material prices for feed business. At the operational level, operating profit grew by 10.77% YoY, translating to operating profit margin at 6.35% (+27bps). Net profit also grew by 10.66% YoY in 1Q20. We believe that feed business will continue to support the margin, due to JPFA’s ability to manage its cost of key raw materials.
Concerns of Potential Lower Demand in 2Q20 and Flat ASP
Livebird and DOC (day-old-chicks) prices in Apr-2020 have significantly dropped to the lowest levels since 2014 at IDR11,000/kg and IDR1,400/kg, respectively (exhibit 01). This is likely due to an oversupply in the anticipation of Ramadhan, coupled with a lower demand due to the Covid-19 outbreak. We expect commercial farm operations to potentially be hampered by the weaker volume and steady livebird ASPs that are expected to continue in 2H20. However, livebird and DOC prices have rebounded in May-2020 as the economy reopened. Unfortunately, we believe that this recovery is unlikely to offset the negative impact caused by the exceptionally low prices in Apr-2020. According to a market survey in West Java, live bird prices in July 22, 2020 exceeded IDR22,000/kg. We also noted that Indonesia’s demand for poultry meat depends on the economic recovery, primarily driven by purchasing power. In 2H20, we believe that the purchasing power will be relatively soft and demand could be affected as a consequence of the weakened economy and logistic issue. We expect live bird prices to slightly drop by 1.68%, while DOC prices would drop by 13.28% in FY20E but then stabilized in FY21F.
Hope for the feed Business
To address the oversupply, the Ministry of Agriculture has issued multiple mandates to the integrators through the culling program to reduce the final stock hatching-eggs (aged 19 days) by 13mn to 15mn per week from Jan-Feb 2020. Furthermore, 15m final stock HE will be withdrawn per week from Jan-2020 to Dec-2020. From the management side, JPFA has also taken the action to cut non-essential new capex budget due to the Covid-19 outbreak. Even though commercial farms might potentially show an unhappy result this year, we hope that feed business will offset commercial farm’s decline given its cost pass through scheme. Historically, feed operating margin has been stable around 10%-11% in the last 5 years.
Valuation and Recommendation: HOLD with TP at IDR1,150
We revised down our call for JPFA to HOLD at TP: IDR1,150 (from BUY at TP:IDR1,700) which implied PE FY21F at 8.64x. We trim our revenue and net profit estimates for JPFA as we believe that the poultry industry might face a lower demand and the live bird prices will be flat. JPFA stock has already bounced back to 44% from the lowest level in Mar-2020. Downside risk to our call: 1) lower purchasing power; 2) higher COGS due to supply chain disruption; 3) higher than expected key raw materials; 4) depreciation of IDR.
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