SINGAPORE (Mar 5): UOB KayHian is maintaining Japfa at “buy” despite the stock’s 8% share price correction over the past two days in response to the African Swine Fever (ASF) in Vietnam.

Management has estimated a maximum net profit impact of US$15 million ($20.3 million), or 12% of Japfa’s FY18F core net profit, if the disease destroys 10% of its swine fattening volume and 20% of its feed volume in Vietnam. Fortunately, none of Japfa’s farms have been impacted so far.

Also, an ASF outbreak could lead to a spike in swine prices and shut down backyard farms which make up around 65% of the industry, allowing Japfa to increase its market share. Meanwhile, Japfa has put in place preventive measures in its swine breeding farms such as additional showers, better logistics systems and more surveillance.

In a Tuesday report, UOB analyst John Cheong says Japfa’s FY18 core PATMI exceeded expectations of the research house by 12% and soared 676% y-o-y on a low base of FY17 when operations faced multiple headwinds - namely China’s restriction on swine imports from Vietnam and the weak poultry performance in Indonesia.

The Indonesian poultry segment’s FY18 core PATMI surged 141% y-o-y due to higher ASPs for Day Old Chicks and broilers in Indonesia. On the other hand, 2018 core PATMI for the Animal Protein Other (APO) segment reported a strong turnaround.

For FY18, Japfa increased its full-year dividend significantly from 0.5 cents to 2.0 cents, the highest level since its IPO. On Monday, Japfa bought back 300,000 shares at $0.71 each to reflect its confidence in the business. Despite KKR’s divestment of a 3.3% stake in Japfa’s listed subsidiary in Indonesia, they remain a substantial shareholder with an 8.4% stake.

See: Japfa posts 80-fold increase in FY18 earnings to $135.4 mil on record revenue

In FY19, the growth of the Indonesian poultry segment should continue but at a more moderated pace after a robust FY18.

“We raise our 2019-20 net profit forecasts by 5.4-5.8% after raising our net profit forecasts for the Indonesian poultry and APO segments on better-than-expected ASPs and operating margins,” says Cheong.

UOB has an SOTP-based target price of 98 cents, which implies 10.7x 2019F earnings, or a 33% discount to peers’ 15.9 times.

As at 3.10pm, shares in Japfa are up 0.5 cent at 71 cents.