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Stock Index
Bahana Securities

26 Sep 2018 | 13:20 WIB
INDEX
SCORE
POIN
%
COMPOSITE
5.867,577
-14,643
-0,249%
Last 1 day
IDX30
506,315
-1,426
-0,281%
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MBX
1.652,827
-3,955
-0,239%
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973,853
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1.191,793
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512,230
-1,815
-0,353%
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Currencies
Bahana Securities

26 Sep 2018 | 13:20 WIB
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Earnings downgrades on likely weaker-than-expected 2Q17 results

Earnings downgrades on likely weaker-than-expected 2Q17 results

At this stage of the cycle, we believe the risk-reward trade off in investing in the poultry sector still remains more on the negative side, despite the government’s more proactive stance to stabilize chicken prices. Our concerns stem from continued weak demand outlook on the upcoming “Suro” month, likely increase in 2018 DOC production due to 5-10% higher recent GPS import quota and higher local corn prices in 2H17. Finally, we believe consensus will be revising down earnings post releases of 2Q17 results which we expect to be weak. Thus, the sector is currently a NEUTRAL at best. On stock picks, we maintain our preference on JPFA, given its cheap valuation, low net gearing level and business diversification.

On the back of weaker-than-expected DOC and broiler prices for the period of April-June 2017, we believe 2Q17 results are likely to be lower than market’s expectations. Given that Lebaran should be the best quarter for the poultry sector, price surveys indicate that 2Q17 broiler ASP was at IDR18,054 (+3% y-y) and IDR4,313 (-9% y-y) for DOC, below the operating breakeven level of around IDR4,650. On the volume front, we may see lower 2Q17 DOC sales as there were two cullings conducted in April and June, coupled with shorter working days as the Lebaran holiday fell on the 4th week of June. Furthermore, feed ASP during 2Q17 was adjusted down by c.2% q-q to IDR6,100-6,200/kg level, following a drop in domestic corn prices (10-12% q-q) due to the large harvest period during the quarter. Additionally, falling global soybean prices ytd should be supportive of 2Q17 feed margins. Going forward, soybean prices should remain under pressure on higher US production outlook.

 

 

 

On a brighter note, we have started to see some improvement in DOC prices post the government’s announcement of the 3rd culling for this year. DOC is currently selling at IDR4,500/DOC, higher than the average of the past two weeks (period right after Lebaran) at around IDR4,000/DOC. The government has instructed 48 breeders to reduce the nation’ parent stocks by 3mn birds, or around 18% of the total population over the period of 21 June 2017 – 17 July 2017, prioritizing PS that are 55 weeks and older. Note that nation’s weekly DOC production output is currently estimated to be around 60mn birds, while demand is only about 50mn birds. Thus, in our calculation the 18% PS culling should alleviate the oversupply condition for the next 17 weeks. Given that PS peak production period is from week-24 to around week-72, early retirement of PS should reduce DOC production by up to 17 weeks ahead until the next population replacement schedule.

 

Note that the government’s latest guidance on 2017 new minimum wage growth was only at 8.25%, using the new formula of GDP + inflation basis. As a result, 2017 real minimum wage only grew 4.5% y-y, the lowest in the past 7 years. Furthermore, latest administered CPI data recorded at 10.64% y-y growth, primarily caused by higher electricity tariffs. In our view, weakened purchasing power has dampened broiler consumption, lowering DOC demand. That said, we believe the impact of 3mn PS culling this time around may not be as sensitive as the 3mn PS culling back in end-2015 to early-2016, when DOC price soared to IDR5,145 at the peak back in January 2016.

 

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