Japfa Comfeed Indonesia: Rebound faster
- Upgrade to BUY with higher TP of Rp1,700, valuation looks undemanding below -1SD amid earnings recovery
- Positive earnings to be maintained over three quarters ahead (4Q23-2Q24F)
- Higher volume from strong demand outlook to offset pressure from recent spike in the corn and SBM price.
- Revised FY23/24F earnings by 59%/11% on higher DOC and broiler margin assumptions
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Net revenue in line. JPFA recorded net revenue of Rp13.6tn in 3Q23 (+10% y-o-y, +10% q-o-q). This brings 9M23 net revenue to Rp37.6tn, reflecting a 3% y-o-y increase. This was mainly due to the sustained high feed ASP, coupled with strong DOC and broiler prices during the quarter.
EBIT margin improved by +490bps y-o-y, driven by recovery in feed and DOC segments. JPFA recorded an operating profit of Rp1.3tn in 3Q23 (+118% y-o-y, +82% q-o-q). The strong feed segment, where the margin has returned to double digits (10.8% vs. 6.1% in 2Q23), and the profitable DOC segment, which achieved an operating margin of 28.1% (vs. 20.9% in 2Q23), are the main reasons for the better-than-expected performance. On the other hand, despite the commercial farm segment reporting a loss of Rp129bn in 3Q23, this was offset by the strong processed food segment, which recorded an operating profit of Rp121bn. This indicates that the company was willing to sacrifice lower broiler selling prices for its internal slaughterhouse while being able to achieve better margins at the end-consumer level.
Outlook
Near term demand to be supported by seasonality, government aid and election. Looking ahead, as election spending kicks in and with government initiatives like El-nino cash handout which will be rollout in November aimed at boosting consumer spending among the lower income population, we believe that consumer spending power, especially among those in the lower income segment, will recover quickly after some weakness in October. This, in turn, is expected to result in increased chicken consumption.
While the increasing costs of raw materials raise concerns about margin pressure, we are confident that these can be balanced by a positive volume outlook and consistently high broiler and DOC prices. During 3Q23, domestic corn prices surged from Rp5,000/kg in 2Q23 to Rp5,400/kg and further increased to Rp6,400/kg in October. As a result, we anticipate elevated input costs for the fourth quarter, considering the two to three-month delay in corn inventory. Additionally, soybean meal prices reached their highest point in 2023, surpassing US$440/tonne in the final week of October. Nonetheless, we believe these cost increases can be mitigated by a stronger volume outlook in 4Q and support from the resilience of broiler and DOC prices. We do not see any sign for JPFA to reduce its feed selling price given that current feed price level (Rp8,500/kg) is already high enough for the farmers to being profitable. Going forward for the feed margin, we believe the improvement will come mainly from cost improvement.
Stability is anticipated in broiler and DOC prices, attributable to controlled mandated culling. Broiler prices remained steady at Rp21,000/kg, with DOC prices at Rp6,800 in the third quarter of 2023. Although there were temporary declines to Rp19,500 and Rp5,000 in broiler and DOC prices, we view these as short-lived occurrences. We project a robust volume outlook in the future, driven by pent-up demand and sustained lower supply due to culling measures.
Revised our FY23/24F earnings upwards by 59%/11% due to improved DOC and broiler margins. As 9M23 earnings significantly exceeded our expectations and has surpassed our FY23 earnings forecast, we have adjusted our FY23/24F earnings to Rp1.3tn and Rp1.8tn, respectively. This revision involved raising our DOC margin assumption to 6% (from negative previously) and reducing our broiler cost assumption, resulting in lower broiler losses of -1.8% (compared to the previous 3.5%). For the feed segment, we tone down our feed margin assumption from 9.5% in FY23F to 9.0%, and we assume the feed segment to recover later to 9.5% in FY24F as we concern regarding the high corn cost.
Upgrade to BUY with a TP of Rp1,700. We have confidence in JPFA's sustained positive earnings over the next three quarters, which we believe will bolster market confidence and drive the share price upward. Consequently, we are upgrading our previous HOLD rating to BUY. We base this decision on the observation that negative sentiment, such as on margin pressure, is already reflected in the stock price. Furthermore, the current valuation appears attractive, with a 5.3x FY24F EV/EBITDA, which is below -1SD of its five-year historical EV/EBITDA range. Our target price for JPFA is set at 6.2x of FY24F EV/EBITDA, in line with the historical five-year average.
| FY Dec | 3Q2022 | 2Q2023 | 3Q2023 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 12,310 | 12,394 | 13,612 | 10.6 | 9.8 |
| Cost of Goods Sold | (10,568) | (10,323) | (11,049) | 4.5 | 7.0 |
| Gross Profit | 1,742 | 2,071 | 2,563 | 47.1 | 23.7 |
| Other Oper. (Exp)/Inc | (1,200) | (1,323) | (1,202) | 0.2 | (9.2) |
| Operating Profit | 542 | 748 | 1,361 | 151.2 | 81.9 |
| Other Non Opg (Exp)/Inc | 71.9 | (10.5) | (19.9) | nm | 90.3 |
| Associates & JV Inc | 2.72 | 0.23 | (0.70) | nm | (406.2) |
| Net Interest (Exp)/Inc | (186) | (258) | (226) | (21.2) | 12.5 |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | nm | |
| Pre-tax Profit | 430 | 480 | 1,114 | 159.2 | 132.3 |
| Tax | (113) | (126) | (232) | 105.5 | 84.9 |
| Minority Interest | 0.58 | (22.2) | (26.7) | nm | 20.0 |
| Net Profit | 317 | 332 | 855 | 170.2 | 157.8 |
| Net profit bef Except. | 317 | 332 | 855 | 170.2 | 157.8 |
| EBITDA | 801 | 1,025 | 1,628 | 103.2 | 58.8 |
| Margins | |||||
| Gross Margins (%) | 14.2 | 16.7 | 18.8 | ||
| Opg Profit Margins (%) | 4.4 | 6.0 | 10.0 | ||
| Net Profit Margins (%) | 2.6 | 2.7 | 6.3 |
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