SINGAPORE (Jan 20): UOB Kay Hian is upgrading its call on agri-food company Japfa to “buy” from “hold” with a higher target price of 80 cents from 50 cents previously.

This is due to a significant rise in Japfa’s average selling price for its three key segments – swine, raw milk and broiler – since 4Q19.

Swine price in Vietnam has exceeded its five-year high due to the African Swine Fever (ASF) outbreak.

In a Monday report, lead analyst John Cheong says, “We believe the development of ASF in Vietnam is somewhat similar with China, where the number of affected cases will reach its peak in the first six months and then start to improve.”

“Also, we understand that the affected swine is within Japfa’s expectation of less than 25% of its total swine population. We estimate that on a net basis, the profitability of Japfa’s Vietnam swine segment should benefit, as the spike in swine ASP should more than offset the volume decline,” adds Cheong.

The group’s core profit for its swine segment is expected to reach US$28 million ($38 million) in 2020, a significant jump from just US$3 million in 2019.

Meanwhile, raw milk price in China has also exceeded its five-year high since 3Q19 due to undersupply, which the analyst believes is happening because of a prolonged low ASP environment, which has not incentivised the building of new dairy farms.

The analyst notes that dairy used to be Japfa’s most stable segment due to the stability of raw milk ASP in China.

On the other hand, there are signs of ASP recovery in the Indonesian broiler due to government policy. In 3Q19, Indonesia’s Ministry of Agriculture put in place additional culling measures, including orders to 45 poultry breeding companies to cull fertilised eggs and parent stock breeding chickens. Since the implementation of this policy, there has been a sustained recovery in broiler ASP throughout 4Q19.

“We raise our 2019, 2020 and 2021 net profit forecasts by 8%, 38% and 31% respectively after raising our net profit forecasts significantly for Japfa’s Vietnam swine segment and marginally for the China dairy segment on higher-than-expected ASPs which will lead to higher operating margins,” says Cheong.

As at 12.30pm, shares in Japfa are trading 1 cent higher, or up 1.6%, at 65 cents. This implies an estimated FY19 price-to-book ratio of 1.2 times with a dividend yield of 1.1%.