SINGAPORE (Nov 4): On the surface, 3Q19 was a dismal one for Japfa, as the group booked earnings of US$9.6 million ($13.0 million), down 33% from US$14.3 million for the same period in the preceding year. 

Yet, the 3Q19 results were in line with analysts’ consensus expectations.

“The weak performance was driven by lacklustre contribution from Japfa Comfeed Tbk (JPFA), whose EBIT declined by 52.2% y-o-y to US$29.8 million,” says DBS Group Research lead analyst David Hartono in a Thursday report. 

He adds that the weak result was due to the slippage of broiler and day-old-chicks (DOC) prices at the end of the quarter as well as higher corn price which pressured the EBIT margins of both DOC and broilers. 

In its outlook statement released on Oct 30, Japfa noted that revenue and profitability was directly impacted by cyclicality in the agri-business. 

“These include the seasonality of harvest and festivals, macroeconomic conditions that affect consumer purchasing power, government policies as well as changes to the market demand and supply situation which determine raw material costs and selling prices,” the group said. 

Hartono notes that Japfa’s 9M19 core PATMI came in at US$47.5 million, representing 85% of the brokerage’s estimates and 75% of consensus estimates. 

“In the past five years, the core PATMI in 9M contributed around 85-90% of the total FY estimate,” he adds.

According to Hartono, one key global occurrence that has been threatening to dampen the prospects for Japfa is the African Swine Fever (ASF) outbreak in Vietnam, which has brought about a lower swine-fattening average selling price (ASP). 

Japfa CEO Tan Yong Nang had noted that due to the nature of the business that involves livestock, diseases represent a “significant risk”.

“The transmission of diseases, such as the ASF outbreak in Vietnam, may affect the business from time to time. These uncertainties may impact the Group’s operations and financial results,” said Tan. 

Indeed, 3Q19 has seen some adverse effects of the ASF in play. Japfa’s weak Vietnamese operations, which represented the bulk of its APO business, resulted in the APO outside Indonesia contributing only US$4.1 million in terms of EBITDA, a slump from the US$14.4 million in 3Q18. 

“In 3Q19, the Vietnam operation recorded an operating loss of US$4.3 million mainly caused by low swine-fattening ASP from pre-emptive sales of swine located in high-risk ASF areas, and low poultry ASP due to an oversupply in the market,” says Hartono. 

Neel Sinha from Maybank Kim Eng Research shares the view, highlighting how the brokerage had anticipated 3Q19 to be the worst operating quarter in the year on the back of low poultry and swine ASPs as well as elevated ASF costs.

“The ASF outbreak caused an initial oversupply due to farmers preemptively liquidating stock; consequently swine ASPs fell considerably during March to July,” says Sinha in a Friday report. 

Looking ahead, Sinha foresees that ASF is likely to remain a key determinant in Japfa’s performance as the spread of the disease continues to affect backyard and small farms, and industrial farming companies including Japfa. 

Separately, a bright spot for Japfa comes in the form of softer broiler prices, following the Indonesian government’s programme to maintain farmer level food commodity price stability. 

“Whether this is adequate to tackle the oversupply situation in the long term remains to be seen but should be positive for broiler ASPs in the near term,” says Sinha. 

Moving forward, the analysts envision a tough road ahead for Japfa – one laced with challenges that will require the group to tread cautiously in a competitive and volatile market. 

Hartono attests that while the competitive poultry sector in Myanmar could be a window of opportunity for the group, Indonesia and Vietnam operations are likely to face near-term challenges. These include factors such as the normalisation of growth, and margin pressure from higher corn prices, softer broiler prices and potentially more DOC supply entrants into the Indonesian market.

Similarly, Sinha says that potential downsides for the group include disease outbreaks that affect its livestock, unforeseen import restrictions or regulations on tariffs for protein imports as well as volatile or prolonged low market prices for its protein and dairy products due to demand and supply imbalances. 

Nevertheless, Sinha remains bullish on Japfa’s ability to thrive in what has historically been a strong quarter in terms of demand. 

“4Q is usually a seasonally strong demand quarter,” says Sinha. “Additionally this year we expect some sequential improvement in Indonesia poultry and Vietnam swine ASP.”

“Swine ASPs in Vietnam started to recover in Oct and the Indonesian government’s 3Q19 decision to extend the culling measures should support poultry ASPs in the coming months,” adds Sinha. 

On the back of a potential inflection point in Japfa’s share price, Maybank Kim Eng is maintaining its “buy” call on Japfa, with an unchanged target price of 73 cents. 

Meanwhile, DBS Group Research is maintaining its “hold” call on Japfa, with a target price of 53 cents, citing near-term cyclical challenges that the group could face, especially for operations in Vietnam and Indonesia. 

Shares in Japfa closed 2 cents higher, or 4.082% up, at 51 cents on Friday. This translates into a price-to-earnings (PE) ratio of 12.2 times and a dividend yield of 0.9%, according to DBS valuations.