We have been bullish on this stock and have written about CPIN when the stock was trading at around Rp1,000. We like the oligopolistic nature of this chicken feed industry. The two biggest players (CPIN and JPFA) controlling more than 60% market share, commanding pricing power and brand loyalty. It appears that easy money has been made with the stock quadrupling.
Still, Jessica is pointing out that there are some upside potentials. At 7.7x PER CL11, valuation is not yet demanding despite the stellar stock price performance. The key risks here are sudden spikes in corn or soybean meal prices (input prices) and CG concerns.
Jessica is now officially covering the stock with a BUY rating and Rp6,600 TP.
The company holds a dominant 39% market share in poultry feed production, comprising 74% of the company’s revenue. DOC makes up another 13% of revenue, in which CP Indo has 37% market share.
Poultry consumption is very low in Indonesia but could double over the next five years driven by rising per capita income, an expanding middle class and a change in consumption taste. Average Indonesians consume only 4.2kg of poultry meat per year versus Malaysia consuming 34.5kg.
The poultry feed industry is oligopolistic in nature, thus CP Indonesia has maintained prices while input costs halved in 2009. The continued weak recovery in soft commodity prices coupled with strong demand for chicken meat, means margins look sustainable.
We believe the stock could re-rate to a higher multiple based on improved investor’s sentiment over Charoen Pokphand name, and the sustainability of its margins.
Our TP of Rp6,600 is set based on 11.0x 2011CL PE, implying a 43% upside to the current level and a 55% discount to the fair value based on DCF valuations. BUY
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