CIMB Securities 2015-08-13: Petra Foods Limited - 2Q15; Challenging times in Indonesia. Maintain REDUCE.


Challenging times in Indonesia 

  • The previously resilient consumer business model of Petra Foods continued to crack in 2Q15. Petra’s 2Q15 net profit of US$7.4m was short of our and consensus expectations, at 18% and 16% of the respective full-year forecast. 
  • 1H15 earnings were at 34%/30% of our/consensus full-year estimates. 
  • The Indonesia market continued to see yoy sales decline, the quantum of decline magnified by a falling Rp and margins further crimped by rising costs on a falling Rp. 
  • The weak results necessitated further cuts to our below-consensus FY15-16 forecasts by 18-21%, and our target price (still based on 26x CY16 P/E) falls further (to S$2.53).
  • Times are still extremely challenging in Indonesia. Maintain Reduce, with expected earnings cuts as a key negative catalyst. 

2Q sales fell 3% yoy constant currency, -12.7% on headline 

  • The besieged Indonesian consumer is Petra’s main problem. Back in 1Q15, wholesalers de-stocking was blamed for weak Indo sales (-12% yoy, constant currency). That de-stocking did not end. The Lebaran festivities in 2Q15 reduced the yoy sales decline (-5% yoy, constant currency) but this second quarter of decline confirmed our fears of a prolonged downturn in Indonesian consumption. 
  • Regional markets (+2% yoy, constant currency) did better but the headline revenue of both Indonesia and regional markets declined, by 15.7% and 4.7% respectively, when one factors in the stronger US$. 

Margins keep falling 

  • Last year, Petra Foods could still keep the effects of a falling Rp at bay. By 1H15, the effects of a falling Rp have hiked up material costs (in US$) enough to drive two sequential quarters of gross margin contraction, a trend never previously seen. 
  • 2Q gross margins slipped to 29.3%, contracting further from 1Q (30.3%). 2014 gross margins were closer to 32%. 
  • Management guided that it has already implemented pricing adjustments and product rightsizing for selected products in July 2015 to mitigate the higher input costs. 

Sacrifice sales for margins? 

  • The conundrum is that 1) a falling Rp, 2) imported inflation in Indonesia, and 3) a weak job market that has spread from commodity to manufacturing, already made it challenging for consumers to keep up their chocolate consumption habits. 
  • Further price hikes will only make it more difficult to stem the decline in sales volume; Petra is caught between the devil and the deep blue sea.

Kenneth NG CFA | Jonathan SEOW | CIMB Securities 2015-08-13
REDUCE Maintain REDUCE 2.53 Same 3.00