Tuesday, October 9, 2012

Not the Time to Chicken Out

Citigroup : CPIN JPFA

Indonesian Poultry

Not the Time to Chicken Out

Raise TP for CPIN and JPFA; Upgrade CPIN to Buy — Following our 2012-2014E earnings upgrade and rolling forward our valuation, our TP for CPIN is raised to Rp3,580 (prev. Rp3,240) and JPFA to Rp6,180 (prev. Rp5,500). Our top pick is CPIN and thus we upgrade our rating from Neutral to Buy. Ability to pass on cost hikes given market-leader status and exposure to the higher-margin processed chicken business are key positives to cushion against volatile commodity/DOC prices. As for JPFA, we remain buyers of the stock. Given feed and DOC portfolio, JPFA would also be a key beneficiary of downtrends in commodity prices and uptrend in DOC prices. Furthermore, the recent merger of JPFA and MBAI means lower interest costs and further expansion plans.

CPIN to fare better — Despite earnings downside risks in 3Q12 following higher commodity prices and lower DOC prices, CPIN should fare better than JPFA, in our view. Key reasons: a) as the market leader, CPIN is better equipped to withstand the price volatility and to pass on the costs via ASP increases. To date it has increased feed ASPs by 20% while JPFA has only increased it by 10%; b) CPIN’s higher margin value-added processed chicken business should provide a further cushion to the weak DOC prices; c) in-house R&D allows CPIN to develop a costeffective formulation for its raw materials.

Optimism reserved post 3Q12 — Key reasons: a) DOC prices are slowly inching up again. From the lows of Rp1,000/DOC it has appreciated to current levels of Rp3,200/DOC. We expect the uptrend to persist in anticipation of rising demand of poultry meat on the back of the year-end festivities (Eid-Al-Adha, New Year and Christmas). b) Commodity prices are on a downtrend. It is worth noting that once poultry companies raise their feed ASPs, they don’t typically adjust it downwards, even during a commodity price downturn. As such, margin expansion likely.

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