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Indonesia poultry stocks may keep soaring on supply woes, CIMB says

[JAKARTA] Indonesia's chicken shortage could worsen this year, driving further gains in poultry stocks, according to CGS-CIMB Sekuritas.

The nation's poultry association projects that the supply of chicks will drop to 3 billion in 2019 from 3.2 billion last year, after the the government banned the use of antibiotics in chicken feed, analyst Patricia Gabriela wrote in a report. A shortage of chickens has boosted the stock price of poultry producer PT Charoen Pokphand Indonesia, which has climbed 2.8 per cent since the start of 2019 after surging 140 per cent last year.

Other poultry companies including PT Malindo Feedmill and PT Japfa Comfeed have also rallied, as a growing middle class in the world's fourth most populous nation shifts its protein consumption to meat from grains. Shares of Malindo, CIMB's top stock pick for the industry, have gained 20 per cent this year after rallying 89 per cent in 2018. Japfa has surged 27 per cent so for this year, adding to its gain of 65 per cent in 2018.

CP Indonesia is expected to report a record profit for 2018, with its widest net profit margin in five years, according to analyst estimates compiled by Bloomberg. The price of a day-old-chick, known as DOC, rose 42 per cent year-on-year in January, after poultry prices reached all-time high last year, according to Gabriela.

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"The higher DOC price reflects its more acute shortage, which we expect to normalize in 3Q19F," wrote Gabriela, who maintains an overweight recommendation on the industry. "We expect the sector's up-cycle momentum to last up to 2Q19."

Still, higher corn prices and the government intervention pose risks for the industry. President Joko Widodo has been putting more effort in controlling inflation and prices of basic necessities ahead of presidential and general elections in April.

While the government can ask producers to cut prices, especially if the cost of chicken rises too steeply ahead of the Ramadan festive season in the middle of this year, CIMB says not much can be done to fix the industry's shortage.

"The government can only ask the big poultry players to sell DOC at a discounted price to independent farmers," Gabriela wrote. "Overall, we believe there is not much the government can do to correct the current environment of supply shortage."

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