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Broker's take: CGS-CIMB downgrades Japfa to 'reduce' after African swine fever outbreak

CGS-CIMB has downgraded its call on Japfa to "reduce" from "add", and cut its target price for the stock to 63 Singapore cents from 90 cents, saying that the agri-food player faces more downside in the longer term. This comes despite the market already pricing in the effects of the African swine fever (ASF) outbreak in Vietnam, the brokerage said.

At 11.47am, Japfa shares were trading at 67 Singapore cents, down 4.5 Singapore cents or 6.3 per cent on the day.

ASF has been spreading at a "rapid pace" in the North of Vietnam, CGS-CIMB analyst Cezzane See said, and even though industrialised farmers are better protected from the outbreak, "there are no guarantees they will not be affected".

With decreased supply of swine, prices could be maintained in the near term but this might not hold if consumers shift to other sources of protein.

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In its report, CGS-CIMB noted that Japfa could re-rate until Q3 FY2019 on sustained poultry margins in Indonesia ahead of the Lebaran season  - around the month of Ramadan - and the continual day old chick (DOC) supply shortage. But margins could moderate in the medium term.

"However, in the longer term, potentially narrower year-on-year growth for Japfa’s poultry business towards FY2020F and larger than-expected disruption in the Vietnam swine business could be risk factors," CGS-CIMB said.

Ms See said that potential catalysts/risks to the brokerage's rating on Japfa include sustained/lower margins of its poutry operations in Indonesia, lower/higher-than-expected losses in Vietnam swine business, and higher/lower profits from the dairy business.