RHB Securities 2015-08-17: Petra Foods Limited - 2Q15; Results Dampened By Double Whammy. Downgrade to SELL.

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PETRA FOODS LIMITED P34.SI

Results Dampened By Double Whammy

• Petra Foods’ 2Q15 results were below expectations, as it suffered a double blow of the IDR depreciation and weak demand in Indonesia. 
• Downgrade to SELL (from Buy), with a DCF-derived TP of USD2.50 (from USD4.55, 17% downside). 
• We highlighted the former as a key risk earlier, and with the IDR now expected to depreciate further against the USD, margin pressure could intensify further. 

 Net profit plunges. 

• Petra Foods’ 2Q15 revenue fell 13% YoY, causing PATMI to decline 40% to USD7.4m. This was due to weaker gross profit margins and a negative operating leverage. In Indonesia, Petra’s main market contributing 70% to revenue, sales declined by 16% despite a run-up to the Lebaran festivities in 2Q15. 
• We expect the sales momentum to be weaker next quarter accordingly. 

 Our key risk highlighted earlier is now realised. 

• The disappointing results were significantly exacerbated by the IDR weakening against the USD (USD/IDR +11% YTD). Local currency revenue was down only 3% YoY. 
• We estimate around 60% of its cost of goods are denominated in USD. Thus, despite the softer commodity prices, gross margin contracted to 29.3% (vs 31.9% in 2Q14). 

 Demand weakness affecting lower income group. 

• On top of the IDR’s declining value against the USD, there was weakness in demand in Indonesia, which limited Petra Foods’ ability to pass on higher costs (as it had done normally). 
• Management shared that the weak spending was most apparent amongst the lower-income group, which accounts for about 50% of their sales. Many retailers and distributors also cut back on inventory, due to uncertainty. 

 Further weakness ahead, downgrade to SELL. 

• RHB Research expects the IDR to weaken further against the USD in 2015, which will cause more pressure on margins, in our view. 
• Management is seeking to proactively reduce operating costs and reduce its capex. 
• We cut our FY15F-17F earnings by 31-39%, and pare down our DCF-derived TP to USD2.50, which implies 31x FY16F P/E. 
• Downgrade to SELL from Buy.

James Koh | http://www.rhbgroub.com/ RHB Securities 2015-08-17

SELL Downgrade BUY 2.50 Down 4.55