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DBS remains neutral on Japfa as it expects its near-term outlook to remain subdued

Chloe Lim
Chloe Lim3/25/2022 11:31 AM GMT+08  • 2 min read
DBS remains neutral on Japfa as it expects its near-term outlook to remain subdued
DBS Group Research has kept “hold” on Japfa as the group’s near-term outlook remains subdued
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DBS Group Research analyst Cheria Christi Widjaja has kept “hold” on Japfa as she sees the group’s near-term outlook to remain subdued due to the limited room for margin improvements in FY2022.

“We foresee cost pressure lingering in 2022, as raw material and logistics costs stay elevated,” says Widjaja. This is in light of the recent Russia-Ukraine crisis, which has impacted a variety of commodity prices such that materials including soybean meal and corn skyrocketed recently. The analyst notes how this stands to limit margin improvements from demand recovery amid gradual reopening.

Moreover, in light of the resurgence of the African Swine Flu (ASF) outbreak, the analyst believes that there is a weak near-term outlook for Japfa’s Vietnam swine operation. This is compounded by existing Covid-19 movement restrictions that influenced softer swine prices.

However, Widjaja remains positive on certain aspects of Japfa’s business, such as strong broiler prices in Indonesia with the upcoming Ramadhan season and favourable raw milk prices in China.

Some risks include a surge in Covid-19 infections, higher-than-expected raw material costs, weaker-than-expected consumer demand, and greater or continued outbreak of diseases that would lead to price volatility.

In her report dated March 24, Widjaja has kept her target price unchanged at 67 cents, as she has kept her EBITDA forecasts for the FY2022/FY2023 the same following Japfa’s FY2021 results.

See also: CGS-CIMB and OCBC increase TP for MPACT, maintain 'add' and 'hold' calls

“We used a sum-of-the-parts valuation and pegged our valuation of Animal Protein Indonesia to our target price for Japfa Comfeed Indonesia (JPFA) at 2,060 rupiah (19.46 cents), while valuations of its Animal Protein Others and Dairy segments are based on FY2022 EV/EBITDA,” she writes.

“Our target price implies a 7.9x FY2022 P/E. Japfa currently trades at an FY2022 EV/EBITDA of 5x and an FY2022 P/E of 7x, which is lower compared to the average of its regional peers in the animal protein and dairy sector, which is at an FY2022 EV/EBITDA of 10x and an FY2022 P/E of 14x,” she continues.

As at 11.19am, shares in Japfa are trading at 1.5 cents up or 2.36% higher at 65 cents at an FY2022 P/B of 0.6x and dividend yield of 1.6%.

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