SINGAPORE (Aug 8): Lower average selling prices and higher costs drove earnings for agri-food company Japfa down to US$5 million ($6.8 million) for the 2Q19 ended June, a steep 83% drop from a year ago.

Segmentally, one of the key contributors of Japfa’s weak performance was Japfa Cornfeed Tbk (JPFA), which saw earnings decline 23% y-o-y to US$18.6 million. This was on the back of higher corn prices, which pressured margins, and softer broiler prices, which led to EBIT declining 27.2% y-o-y to US$65.2 million.

Similarly, the Animal Protein Other segment reported an operating loss of US$0.1 million for 2Q19, compared to an operating profit of US$10.1 million a year ago, as a result of a lower swine fattening average selling price in Vietnam. This was largely due to the impact of the African Swine Fever outbreak in Vietnam.

Higher costs incurred for the quarter were a result of higher raw material input costs and higher tariffs on imports affected by the US-China trade war. There were also higher financing costs due to the increase in working capital loans for higher cost of goods sold.

See: Japfa posts 83% drop in 2Q earnings to $6.8 mil on lower average selling prices

To be sure, Japfa’s big earnings miss in 2Q is putting yet more pressure on its share price.

Shares in the counter closed 1.0% lower at 48.5 cents on Thursday, hovering just half a cent away from its 52-week low. Already, its shares have plunged 42% from its recent high of 84 cents in February this year.

However, market observers believe all is not lost for Japfa.

Amid the slowing economy and weaker contributions from countries impacted by higher costs and lower demands, the group’s decision to diversify its operations seem to have been a saving grace.

Southeast Asia remains the driving force behind an increase in revenue, primarily in the dairy segment.

For a start, Indonesia’s revenue improved in 2Q19, recording an operating profit of US$62 million and a feed EBIT margin of 11% excluding the one-off items. This contributed significantly to JPFA’s revenue growth, through a higher sales volume for poultry and aqua feed, which grew by approximately 9% and 18% respectively.

While the poultry sector in Myanmar remains competitive, Japfa has managed to reported profits in the country for the second consecutive quarter.

Analyst foresee a turnaround for Japfa, as long-term growth seems to be within reach despite near-term cyclical headwinds.

This is aided by factors including a structural animal protein consumption in Indonesia and a potential upside from the dairy segment with potential improvement in raw milk prices.

In addition, the government’s plan to stabilise broiler prices with proactive measures in 2H19 would bolster growth prospects for Japfa, as the group would be better placed to manage supply due to reduced price fluctuations.

Despite continued pressure slated to hit Indonesia and Vietnam operations in 2H19, DBS Group Research analyst David Hartono sees an attractive long-term outlook for the company.

“While we believe in the long-term structural growth in animal protein consumption, we believe that JPFA’s Indonesian operations (which is its current largest profit contributor) is undergoing near-term cyclical pressures. In the long term, the group’s diversification across different geographies would help mitigate the fluctuations,” Hartono says.

The brokerage is maintaining “hold” call on Japfa with a lower target price of 53 cents, down from 61 cents previously.

Meanwhile, Maybank Kim Eng Research is maintaining its “buy” call on Japfa, with a lower target price of 73 cents, down from 93 cents previously.

“Aside from the usual cyclical product ASP swings, potential regulation change, raw material cost volatility and weather-related risks inherent to agri-businesses, the specific risks to our outlook lie in JAP’s consumer foods business posting higher-than-forecast losses and emerging Asia currency weakness versus USD,” says analyst Neel Sinha.

Sinha also remains bullish on Japfa’s revenue increase despite soft poultry and swine ASP.

According to DBS valuations, Japfa is trading at an estimated price-to-earnings (PE) value of 11.52 times and a dividend yield of 0.96% for FY19F.