THE near-term outlook for industrial agri-food company Japfa UD2 : UD2 0% will likely remain subdued, with margin pressures extending into 2022 given high raw material and logistics costs, DBS Group Research said.

In a research note on Tuesday (Feb 22), DBS analyst Cheria Christi Widjaja downgraded the counter to “hold” from a “buy” call, and cut its target price to S$0.67 from S$0.89, while expecting costs to stay elevated at least until the first half of 2022.

Shares of Japfa were trading flat at S$0.625 as at 1.54 pm on Tuesday.

Widjaja had cut earnings forecasts by 28 per cent for FY2021 and 27 per cent for FY2022 to incorporate the group’s weak performance in the third quarter of 2021, as well as a more conservative margin outlook for the fourth quarter and for FY2022.

Additionally, she noted that the resurgence of the African Swine Fever in Vietnam during the fourth quarter of 2021 will likely weigh on swine prices, and hit Japfa’s overall margin in the quarter and in FY2022.

The analyst said the market has likely already priced in the potential slow earnings recovery, noting that Japfa’s share price has corrected by around 10 per cent since its third quarter results announcement.

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However, while the company’s valuations are relatively cheap compared to peers and trades at an undemanding valuation of around 7 times the brokerage’s estimates for FY2022 earnings, Widjaja said she “(prefers) to wait for better signs of recovery in Vietnam’s swine operation and Japfa’s overall margin”.

Nevertheless, the company may see a pick-up in demand from economic recovery as Covid-19 stabilises across countries, leading the analyst to raise revenue forecasts by 10 per cent for FY2021 and 6 per cent for FY2022.

Breaking it down by segments, Widjaja expects strong performance in Japfa’s dairy business in China, as well as an improvement in Indonesia’s poultry operation, which can mitigate the potential weakness in the Animal Protein Others segment, especially in its Vietnam swine operation.

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