Equity Research

Poultry

Thursday,21 March 2019

NEUTRAL Poultry
Maintain First culling of the year, oversupply?
CPIN relative to JCI Index The government’s intention to reduce the livebird population through its
culling program is expected to lift livebird prices. We view this as a positive
development for all integrators including Charoen Pokphand Indonesia
(CPIN), Japfa Comfeed Indonesia (JPFA), and Malindo Feedmill (MAIN) as the
program would ease margins pressure in their downstream businesses.
However, this move also indicates that the current market dynamics are in a
state of oversupply, or in contrast to the market`s belief that there is
undersupply in the market.

A culling program would lift broiler prices. To anticipate prolonged weak

broiler prices in March – April 2019, the government is circulating a regulation
to cull Day-old-chick Final Stock (DOC FS) for all breeders in Java and Sumatera.
There are 48 Parent Stock (PS) breeders mentioned in the circular letter
including CPIN, JPFA, and MAIN. All breeders will have to reduce their
JPFA relative to JCI Index
xxxx production by 10% in the period 21 March – 8 April 2019.

The culling program is the sixth program implemented by the government since
the release of Minister of Agriculture Regulation No.32/2017. The current
culling program is contained in the Director General of Animal Health and
Husbandry`s circular letter No. 03124SE/PK.010/F/03/2019 announced on 19
March 2019. While the news circulated states that 41 breeders are included,
there are 48 names in the circular letter. These 48 names are the same as the
48 names which had to cull their PS back in June 2017, of which only 43 names
received the culling quota.

Source : Bloomberg The culling program indicates oversupply. The effect of the culling of DOC FS
from 21 March until 8 April will be seen in one month. As such, the program is
expected to lift broiler prices in the period 21 April – 8 May 2019. Nonetheless,
the effect should subside in the second week of May, which marks the start of
Ramadan when broiler prices are typically higher. In our view, this move also
indicates that the current market is in a state of oversupply, as the government
believes that supply remains abundant prior to the fasting month.

Maintain Neutral despite this positive development. We maintain our Neutral

x Victor Stefano view on the sector as we believe the current market expectations are excessive.
(62-21) 2955 5888 ext. 3503 We still expect lower y-o-y earnings growth due to margins compression
victor.stefano@danareksa.co.id stemming from lower broiler and DOC prices. We have not included the
possibility of future culling programs into our numbers.
Target Market
Price Cap. P/E (x) P/BV (x) ROE (%)
Company Ticker Rec (Rp) (RpBn) 2018F 2019F 2019F 2020F 2020F
Charoen Pokphand CPIN IJ SELL 5,700 135,283.5 29.3 34.2 7.0 6.3 19.5
Indonesia
Japfa Comfeed Indonesia JPFA IJ BUY 2,950 26,016.0 11.7 10.5 2.2 1.9 19.5
Malindo Feedmill Indonesia MAIN IJ BUY 2,400 3,358.1 11.5 14.0 1.6 1.5 11.4

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 Exhibit 1. Broiler prices in West Java (IDR ‘000/kg)

Source: Pinsar, Danareksa Sekuritas

Exhibit 2. Historical culling program

% of Implied
Amount Duration
No Culling date Type population population (mn)
1st 27-Mar-17 FS 5 million/week 2 weeks 8.0% 62.5
2nd 23-May-17 FS 24 million/week 1 weeks 40.0% 60.0
3rd 21-Jun-17 PS 3 million 3 weeks 18.0% 16.7
4th 12-Sep-17 FS 2.4 million/week 5 weeks 6.0% 40.0
5th 30-Oct-17 FS 6 million/week 9 weeks 9.5% 63.2
6th 21-Mar-19 FS n/a 3 weeks 10.0% n/a
Source: Danareksa Sekuritas

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