Japfa kept at 'hold' with target price of 46 cents by DBS

The earnings of agro-food company, Japfa, are being affected by lower selling prices of their key products, according to DBS Group Research.

DBS estimates that the average selling price (ASP) of Japfa's live broiler and day-old chick (DOC) by up to 8% and 16% respectively. The bank has also lowered its expectations for the sales volumes for both broilers and DOC by -2% each, due to factors like early retirement of the company's parent stock and culling of unhatched eggs.

In a report on July 2, DBS says the revisions to these earnings drivers have led it to cut forecasts of Japfa's Ebitda by 12% to 24% for FY2015 and FY2016. "Our previous forecasts had assumed that the industry had started culling their parent stock early this year, which should have resulted in higher ASP. This did not happen, while the Rupiah and purchasing power continued to weaken year-to-date," says DBS analyst Ben Santoso.

But going forward, the weakness in DOC prices may be tempered if an agreement for a proposed cut to the parent stock among industry players is enacted. "While there remains a debate as to which players should undertake a bigger share of the cut, the resultant impact could well tackle the oversupply situation and boost prices through next year," says Santoso.

Based on his preliminary analysis, a 23% cut in Japfa’s parent stock would lift its FY2015 and FY2016 earnings by 33% and 19% respectively, on the assumption that DOC and broiler ASP would recover by 5% y-o-y.  The recovery in ASP is however less than the rate of inflation in Indonesia.

As a result of the uncertain earnings outlook, DBS' Santoso has cut his target price for Japfa to 46 cents from 54 cents previously, He has also maintained a 'Hold' recommendation on the stock. But he believes an upside catalyst for Japfa  will be triggered if .the proposed industry-wide cut of 23% in the parent stock is implemented.

Japfa's shares are trading flat at 39 cents.

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