SINGAPORE (April 2): Maybank Kim Eng is maintaining “buy” on Japfa with an unchanged price target of $1.05 despite recent declines in Indonesian poultry stocks, due to market fears of oversupply after broiler prices declined further in March.

In a Tuesday report, analyst Neel Sinha says these concerns are likely overblown, as he concurs with Japfa’s management theories that the broiler price correction has more to do with seasonal weak demand rather than oversupply.

“Prices have corrected every year by 7-30% in a seasonal demand slump sometime late in 1Q/early 2Q (between CNY and Lebaran) followed by a recovery ranging from 26-44% up to Lebaran,” explains Sinha.

“Meanwhile firm day-old-chick (DOC) prices in Jan/Feb-19 also suggest that the DOC shortage persists in the market and it is not an oversupply issue per se, unlike in 2014 or 2017 when DOC prices were falling,” he adds.

A recent discussion with Japfa’s management has led Sinha to conclude that the potential impacts of 2018’s African Swine Flu (ASF) on Japfa’s PATMI appear to be “better than initially expected” –  with a moderate impact scenario of about 6% stock culled suggesting a relatively unchanged PATMI y-o-y, versus the earlier estimated US$12-13 million impact.

He also believes the possible consumption substitution from pork to poultry as a result may offer Japfa some buffer.

In all, Sinha says he continues to like Japfa as one of the cheapest upstream food stocks in Asia Pacific as it is trading at a core FY19E P/E of just 8.2 times – a “huge discount” to over 20 times for its peer baskets of upstream Asia Pacific protein producers and Chinese dairy firms, in his view.

“Its stub FY19E P/E is 3.3 times excluding its 52.4% stake in listed subsidiary PT Japfa Tbk,” adds the analyst.

Shares in Japfa traded flat at 66 cents, or 1.08 times FY19F book value, before the midday trading break.