Japfa Ltd - Is it turning around?


■ We hosted Japfa on a luncheon and management shared its diversification strategy on 1) Comfeed, 2) new markets in Vietnam, Myanmar and India, and 3) dairy.

■ Improved broiler prices in Indonesia and lower raw material prices helped drive the group’s overall results in 3Q15.

■ Broiler prices could improve as the industry is set to cull 20% of overall livestock.

More than just an Indonesian play
Japfa has traditionally been viewed as an Indonesian protein play, but it is much more than that.

While 57.5%-owned Japfa Comfeed remains an important pillar for the group, management has been actively building up its other pillars:
1) animal protein others (protein business in Vietnam, Myanmar and India), and

2) dairy.

Core earnings contribution is now fairly diversified (based on 9M15): Comfeed (34%), animal protein others (43%), dairy (29%) and consumer food (-6%).

3Q15’s results suggest a possible turnaround
Since its IPO, Japfa has been reporting declining earnings in the midst of multiple headwinds:

1) weak broiler and day-old-chick (DOC) prices,

2) lower milk prices in China,

3) weak currencies,

4) oversupply conditions that are depressing prices, and

5) weak Indonesian consumption.

While many of these headwinds are still apparent, 3Q15’s results indicate a possible turnaround. Ex-bio asset and forex losses, Comfeed posted a record net profit of US$19.6m in 3Q15 (3Q14: US$2.2m, 2Q15: US$1.3m).

Technical Analysis
Daily Chart
The biggest near-term catalyst: broiler prices 
The big turnaround in 3Q15 was driven by Comfeed, due to

1) improved operating margins (from lowered corn and soya bean meal prices), and

2) improved broiler selling prices.

The industry is poised to cull 20% of overall livestock, which should help alleviate the demand-supply mismatch and improve overall selling prices. (Read Report)

Source : CIMB Research

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