Given the shrinking swine population in Vietnam due to the worsening of the African Swine Fever (ASF) outbreak, we expect weaker demand for YSP Southeast Asia’s (YSP) veterinary products. We reduce our 2019-21E core EPS by 10-11% mainly to factor in the potential impact from the ASF outbreak. Maintain BUY with a lower target price (TP) of RM3.00, given undemanding valuations and reasonable dividend yields.

African Swine Fever – a Bane to YSP’s Veterinary Product Demand

ASF is a highly contagious haemorrhagic viral disease affecting pigs and wild boars, with up to a 100% case fatality rate. Though the virus first appeared nearly 100 years ago, there has been no vaccine or cure for the disease. The virus has spread to 87%, or 55 out of 63 municipalities and provinces in Vietnam, and caused a significant decline in the swine population in Vietnam (to date, 2.5m pigs culled in Vietnam, 7% of the country’s total pig population). We believe this could potentially lead to a drop in demand for veterinary products.

Potential Adverse Impact Priced-in, in Our View

While we expect a 20% drop in YSP’s 2019E earnings due to the unfavourable forex rate and ASF outbreak, we believe the recent shareprice decline has reflected the weakness. On a brighter note, we gather that YSP’s sales in Vietnam only accounted for 5% of its total revenue in 2018. Besides that, YSP’s veterinary products are suitable for different types of livestock and animals, hence it should be able to divert its sales to other existing channels such as non-swine farms and veterinary stores. The group’s ongoing efforts in increasing its exports to reduce its reliance on the Vietnam market could also mitigate the adverse impact caused by the ASF outbreak.

Maintain BUY Call With a Lower TP of RM3.00

We reduce our core EPS by 10-11% for 2019-21E mainly to factor in the potential impact from the ASF outbreak in Vietnam. Consequently, we reduce our 12-month TP to RM3.00 (from RM3.35 previously), based on an unchanged target 2020E PER of 14x, which is based on its peer average. We reiterate our BUY rating on YSP given its undemanding valuations and reasonable dividend yield (c.3-4% per annum). Downside risks: worse-than-expected impact from AFS, unfavourable forex rate, product recalls and regulatory risks.

Source: Affin Hwang Research - 21 Jun 2019