SINGAPORE (Mar 14): CGS-CIMB Research is downgrading Japfa to “reduce” from “add” previously, and cutting its target price by nearly a third to 63 cents.

“Our lower expectations for the Vietnam swine business, and the continued moderation in Indonesian poultry margins lower our FY19 and FY20F EPS forecasts by 1.4% and 5.9%, respectively,” analyst Cezzane See says in a Wednesday report.

Even though none of its swine farms have been impacted to date, Japfa is expected to be rocked by the outbreak of African Swine Fever in the north of Vietnam, which has spreading at a rapid pace.

According to reports, the number of infected communities has risen to 79 as at Mar 11.

“Based on the ongoing ASF outbreak in China since August 2018, we believe industrialised farmers (like Japfa) may stand a better chance but there are no guarantees they will not be affected,” says See.

“A silver lining is that swine prices may at least be maintained as the supply dwindles. However, if there is a shift in consumption to other proteins, the demand for Japfa’s swine could also decline,” she adds.

Meanwhile, the analyst is expecting poultry margin in Indonesia to fall to 10.3% in CY19 and 9.7% in CY20, compared to 11% in CY18.

CGS-CIMB says poultry supply and demand should have reached an equilibrium in 2018, following the massive culling exercises in 2016-2017.

However, See says the ban on antibiotics in poultry feed in January last year resulted in an increased mortality rate and growth cycle. This disrupted supply and has led to all-time high day old chick (DOC) and broiler prices.

“Our Indonesian analyst expects DOC prices to continue to rise in FY19F given the growth cycle of DOC, though broiler prices could remain weak in February 2019, before eventually inching up in March 2019,” she says.

“We also note that local Indonesia corn prices rose at end-CY18, which could stifle further growth in feed margins,” she adds.

As at 4.10pm, shares in Japfa are trading 5 cents lower, or down 7.0%, at 66.5 cents. This implies an estimated price-to-earnings (PE) ratio of 8.8 times and a dividend yield of 1.8% for CY19F.