The poultry sector has been unusually strong (Exhibit 1) in the period after this year’s Idul Fitri holiday, locally called Lebaran, with the average selling price of day-old chicks (DOCs) at about Rp 4,941 (38 US cents) each from July to September. The figure is up by 4 percent from the second quarter of this year. The average selling price of broiler chickens, meanwhile, remained flat at Rp 17,533 per kilogram.

The prices of DOCs and broilers have remained relatively robust despite the usual trend of the costs of the two products falling by between 10 and 25 percent after Lebaran, the biggest holiday in Indonesia, the world’s largest Muslim-majority nation.

In our view, the price stability was caused by the culling of 3 million parent stock, which later reduced the nation’s DOC supply by about 15 percent, and lower import quotas that downsized grandparent stock in 2015 by 6.3 percent year-on-year (yoy) to 665,000.

With DOC oversupply close to being eliminated, we believe the DOC and broiler margins in the third quarter of 2016 should remain well supported, although we may see some quarter-on-quarter (qoq) contractions in sales volumes, mainly because of Idul Adha (the Islamic Day of Sacrifice), a religious festivity that traditionally triggers higher consumption of beef and lamb.

Given the 40 percent qoq rise of soybean prices in the second quarter of 2016, a stable average selling price in the subsequent quarter of the product is likely to result in a chicken feed margin contraction, particularly given that soybean accounts for some 25 percent of the cost of goods sold.

On a more positive note, poultry players are requesting a 3 percent hike in the average selling price of feed to the Indonesian Feed Millers Association, which we believe is likely to be granted by this month.

At this stage, the government is targeting zero percent corn imports in 2017 by, for example, allocating 1 million hectares of new land to grow corn. The corn imports fell by 60 percent yoy in the first seven months of the year, in line with government efforts to protect local farmers.

This has led to undersupply conditions for the domestic corn market, evidenced by the decoupling of local corn prices and the global indicator price, which were Rp 4,000 per kg and Rp 1,800 per kg, respectively.

Last month, the Trade Ministry announced minimum and maximum reference prices for a number of products, including corn, which would be valid for four months and be reviewed periodically.

We believe poultry players will not benefit from stocking up during big harvests, when corn prices are at their lowest (i.e., a possible drop to Rp 2,000 per kg).

Overall we expect poultry players like Japan Comfeed (JPFA) to post the strongest earnings in the sector because of high poultry prices. JPFA’s DOC and broiler divisions contributed 45 percent to the company’s sales in the first half of 2016, the highest composition compared to those made by its competitors. We expect JPFA to see leverage improvement and synergies after investment firm KKR recently made investments in the former.

On a more negative note, we are now less positive about Charoen Pokphand (CPIN), mainly because of the consolidation of its broiler divisions, which should cause earnings volatility.

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The writer is an analyst at Bahana Securities.

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