Charoen Pokphand Indonesia (CPIN IJ)
Inline 1Q24 earnings: recovery of livebird and DOC margins offset lower feed margins; upgrade to Buy
- CPIN booked inline 1Q24 net profit of Rp711bn (tripled yoy from 1Q23’s low base), supported by higher chicken prices during Ramadan.
- Feed’s operating profit fell 26% yoy due to margins compression caused by higher costs, but we foresee margins normalization going forward.
- We upgrade our call from HOLD to BUY with a higher TP of Rp5,900, on a better supply-demand outlook and normalized feed costs.
1Q24: higher revenues and margin recovery supported net profit growth
CPIN booked net profit of Rp711bn in 1Q24, triple yoy from 1Q23’s low base and a turnround from net losses of Rp357bn in 4Q23 supported by Lebaran season`s seasonally higher livebird prices. The 1Q23 net profit is 24% and 22% of our FY24F forecast and the consensus, i.e., inline. Supported by all business segments, gross revenue grew briskly to Rp29tr in 1Q24 (+15% yoy, +7% qoq) with the operating margin recovering to 3.6% (+170bps, +317bps qoq), albeit still below its historical average at c. 6.0%.
Margins improvement, partly supported by Ramadan
The 1Q24 margins improvement was driven by the DOC and livebird segments. Both segments saw an increase in margins from higher ASP which were driven by self-culling across the industry and higher demand during Ramadan. Livebird’s operating margin reported a significant improvement to 5.7% (1Q23/4Q23: -3.4/-6.4%). On the other hand, DOC`s operating margin remained negative (due to very weak ASP in Jan24) at -5.8% though still a huge improvement compared to 1Q23`s margin of -26.6%.
Higher input costs dragged down feed business profitability
Despite the higher feed revenues of Rp12.7tr (+6% yoy, +3% qoq), feed’s operating profit contracted to Rp750bn (-26% yoy, -12% qoq) as the margin declined to 5.9% (-258bps yoy, -104bps qoq) due to higher input costs, i.e. higher local corn and SBM prices in 1Q24. We expect an improvement in the feed margin in subsequent quarters from lower input costs.
Upgrade rating to Buy with a TP of Rp5,900
We upgrade our rating to Buy (from Hold) with lower feed costs as the key catalyst. We normalize our EV/EBITDA multiple valuation to 17.5x (5-year mean) from 15.4x (-1SD) as we believe the impact of El Nino on local corn prices as one of the key costs to the business has passed and we also foresee better supply-demand of chicken with lower GPS imports. As such, our TP is raised to Rp5,900 (from Rp5,200 prev.). Risks to our view include lower livebird prices due to a lack of culling and weak purchasing power.
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