PETRA FOODS LIMITED
P34.SI
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 | http://research.itradecimb.com/ CIMB Securities 2015-08-13
2.53
Same
3.00
