Malindo Feedmill Banking On Lebaran

Despite a weakened IDR and DOC price capping headwinds, Malindo deserves attention at this juncture. This is due to:
1. Its attractive valuation – it is currently trading at 10-9x FY16F-17F P/E, close to -2SD from its 5 years mean of 15x;
2. 4Q16 to be another strong quarter – average broiler and DOC prices at ~15% higher than FY15’s numbers;
3. Its share price should perform next quarter due to expectations of better sales volume prior to the Lebaran season.

We lower our FY17F-18F earnings by 6% and change our call to TRADING BUY (from Buy) with a lower DCF-based IDR1,500 TP (from IDR2,100, 26% upside). This implies 11x FY17F P/E, ie -1 SD from its 5-year historical trading band.

Implications of the IDR’s depreciation and day-old chicks (DOC) price capping
Assuming FY17 DOC ASP of IDR4,800/bird, this segment’s margins should be similar to FY16’s estimates (9M16: 5.3%). In addition, we assume a USD/IDR exchange rate of 13,700 for FY17. This means every 1% depreciation in the IDR against the USD from our base case results in a 1% EPS reduction only. Note that Malindo’s latest USD/IDR debt composition stands at 10:90 vs the industry norm of 50:50.

DOC margins expansion capped
Assuming mild growth volumes (+5%) for its feed and DOC segments – as well as the aforementioned assumptions above – Malindo ought to deliver +10% EPS growth in FY17 vs our prior expectation of +20%. Our prior forecast expected the DOC segment’s margins to improve further from FY16’s numbers – driven by improved supply/demand dynamics, notably the DOC price hovering at IDR5,700-6,000/bird prior to the price cap announcement.

The key lies in the magnitude of the feed price adjustments
Locally-produced corn, which makes up ~20% of feed’s raw materials, has seen a price increase of 20% YoY. The poultry companies, Malindo too, are managing to maintain feed segment margins by replacing corn with wheat and increasing feed prices. Going forward, the firm is looking to increase feed prices again. With relatively stable and supportive broiler prices, Malindo might be able to pass on the additional costs and recoup the DOC segment’s lower margins.

Banking on good 4Q16 results and Lebaran
With DOC prices averaging at >IDR5,500 in 4Q16, Malindo is set to deliver another quarter of strong results. These are scheduled to be announced by end-Mar 2017. Furthermore, the share prices of poultry firms tend to perform during the end 1Q until 2Q historically. This is due to strong demand for chickens prior to Lebaran. This might lift Malindo’s valuations from their current, depressed levels.

Key risks to our call are weakness in the IDR and margins compression if the Agriculture Ministry disagrees with the feed price adjustments.

Company Profile
Malindo Feedmill (Malindo) is a poultry company that produces chicken feed, day-old chicks (DOC), chicken meat and processed food. Malindo is majority-owned by members of the Lau family, who are prominent figures in Malaysia’s poultry sector. The family also owns Malaysia-based Leong Hup Holdings and Vietnam-based Emivest.