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Analysis: Will we see positive impact from government intervention in poultry sector?
The Trade Ministry recently added two staple foods to its new reference price list, namely broiler chicken and eggs
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The Trade Ministry recently added two staple foods to its new reference price list, namely broiler chicken and eggs. The list became effective starting May 16, with the issuance of Trade Minister Regulation No. 27/2017.
The suggested price of live birds at the farm gate level is set at Rp 18,000 (US$1.35) per kg, equal to Rp 26,000 to Rp 30,000 per kg in carcass form.
According to the Organization for Economic Cooperation and Development (OECD), farm gate value is the price of the product available at the farm, excluding any separately billed transportation or delivery charge.
Meanwhile, the regulation sets the broiler chicken price at Rp 32,000 per kg in the form of chicken carcass at the consumer level.
The government has appointed State Logistics Agency (Bulog) and state-owned enterprises to intervene in the market when the farmers’ live-bird selling price falls below Rp 18,000 per kg or if chicken-carcass prices rise above Rp 32,000 per kg at the consumer level.
If the government succeeds in implementing this new rule, the broiler price will be less volatile, benefiting farmers along with poultry companies that have high exposure to the commercial farm or broiler farm industry.
Within our coverage, PT Japfa Comfeed Indonesia (JPFA) has the highest broiler-sales contribution at 40 percent in the first quarter of 2017, compared to PT Charoen Pokphand Indonesia (CPIN) at 28.2 percent and PT Malindo Feedmill (MAIN) at 9.9 percent.
The directorate general of domestic trade has suggested culling final stock (FS) for the second time this year.
Following the directorate general meeting held in the third week of May it is estimated there will be a 40 percent day-old chick (DOC) oversupply post the Idul Fitri holidays, with the assumption that DOC production amounts to 63 million per week.
The government has suggested culling up to 40 percent of each company’s total production by not hatching the FS eggs from June 5 to 10.
The time lag from FS eggs to live-bird stocks is around 50 days. Thus, lower FS production should stabilize chicken prices from mid-July until the end of July, post the Ramadan period.
Historically, chicken prices always tank post the Idul Fitri festivities as we enter Idul Adha and Islamic New Year, which will take place in the September-October period.
Note that poultry players are only allowed to sell these unhatched eggs for industrial usage and any excess of unsold eggs is to be donated as part of their CSR programs.
At this stage, we are upgrading our sector view to “neutral” as the government takes a more proactive approach to stabilizing chicken prices, but the effect is yet to be seen.
In our view, the five-day culling program will only support broiler prices temporarily for one to two weeks, unlike the culling initiation program at the end of 2015, when the government required the culling of up to 6 million parent stock (PS) that could lead to lower FS production over half a year.
On stock picks, we are maintaining our preference for JPFA within the sector, given its attractive valuation, low net gearing level and well-diversified business.
It is the main beneficiary of stable chicken prices, given its highest sales exposure to broiler and DOC products.
As their share prices have corrected with limited downside potential to our target prices, we are upgrading CPIN (CPIN:IJ, Rp 3,030, HOLD) and MAIN (MAIN:IJ, Rp 1,095, HOLD) to “hold” with unchanged target prices of Rp 2,900 (15 times price earnings forecast for full year 2017) and Rp 1,100 (8.5 times of price earning for full year 2017), respectively.
Meanwhile, for JPFA (JPFA:IJ, Rp 1,295, BUY), we upgrade to “buy” from “hold” with an unchanged target price of Rp 1,700 (12 times price earnings forecast for full year 2017).
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The writer is a research analyst at the PT Bahana Sekuritasresearch department.
