SINGAPORE (Oct 25): DBS Group Research is reinstating coverage on animal protein play Japfa with a “buy” on projections of an earnings turnaround in 1H18 which would stretch into 2H18 and FY19.

DBS is forecasting FY18F profit to hit US$86.7 million, up from US$1.3 million in FY17 as the research house expects prices of DOC (day old chicks) and broilers in Indonesia to stay strong in 2H18.

This is due to the lack of DOC supply in the market, stability in swine price recovery at above cost levels in 2H18 aiding Japfa’s Vietnam swine operations and its China dairy division benefitting from improving milk yields, says lead analyst David Arie Hartono in a Wednesday report.

Over the medium term, Hartono is also positive on Japfa’s China raw milk potential growth as the company has been showing operational excellence.

“The lower ASP in milk prices has been the key reason in capping the actual sales revenue growth. Therefore, we believe that a recovery of China raw milk price will drive growth for Japfa’s dairy segment,” says the analyst.

Nevertheless, Hartono expects little impact from Japfa’s consumer food segment. He sees this business incurring losses for the next few years, owing to high marketing costs, higher cost of raw materials, and inability to increase ASPs due to competition.

“We do not expect the consumer food segment to meaningfully contribute any earnings over FY18-20F, but this could be a long-term catalyst,” says Hartono.

DBS has target price of $0.86, implying 12.2 tines FY19F earnings.

Year to date, shares in Japfa are up 29.4% to 66 cents at 2.37pm.