Petra Foods - CIMB Research 2015-11-13: Settlement amid tough markets

Petra Foods - CIMB Research 2015-11-13: Settlement amid tough markets PETRA FOODS LIMITED P34.SI 

Petra Foods - Settlement amid tough markets 

  • 3Q15 headline losses included settlement of US$19.5m to Barry Callebaut. 
  • Ex-settlement costs, core profit was the ugliest since Asian Crisis. Core net loss was US$1.2m vs. our and consensus expectations of US$8m-9m profit. 
  • Chief blame lies with Rp's plunge. Inflation rose, impacting consumer sentiment. Shops thinned out inventory with poor sales. Margins were hit by rising US$ costs. 
  • We cut FY15-17 EPS by 15-34%, bringing down our P/E-based (25x FY17) target price to S$1.79. We doubt the pressure in Indonesia will ease anytime soon. 

Settlement expense made poor results even worse 

  • Petra Food’s Indonesia sales and profitability had already collapsed into a downtrend in 2Q15. It got worse in 3Q15. 
  • Indonesia 3Q sales (3Q: -21% yoy; 2Q: -5% yoy) fell even more, as consumers were hit by rising inflation when the Rp nosedived again. 
  • Lower sales derives lower gross profit and that stokes up negative operating leverage. Core PATMI went into losses of US$1.2m, albeit due to withholding taxes booked in 3Q. A big US$19.5m settlement charge made the headline number even worse. 

Indonesia sales have fallen in worryingly big quantum 

  • The pace of deterioration in the main Indonesia chocolate business is worrying. A 21% yoy sales contraction in local currency terms, looks like a crisis, even if it was expected amid a falling Rp and low commodity prices. 
  • In 3Q, retailers thinned down their inventory further amid poor end demand, thus hurting Petra’s sales. 
  • The general trade and mass market price-point products are the worst hit. The modern trade is doing relatively better. 

Indonesia margins have been affected, price hikes implemented 

  • 3Q gross margins have fallen another leg (28.4%) vs. 31-32% in 2014. Petra initially resisted passing on higher US$ costs and suffered in the quarter, before it implemented 3-4% price hikes in late August. 
  • In lieu of the price hikes, Petra expects margins to improve in 4Q, especially with the Rp recovery. 
  • Other costs that add up were higher SG&A costs, as higher logistics costs and more trade promotion costs weighed in. 

Regional markets, particularly the Philippines, doing well 

  • Contributions from regional markets also fell (-5% yoy) albeit at a smaller quantum. 
  • The yoy comparison for regional markets is based on 2014 where Petra had yet to sell out its Singapore distribution business and yet to end several low-profitability third-party brand distribution contracts. 
  • On a like-for-like basis, 9M15 regional sales were up 15% yoy, with the Philippines achieving strong double-digit growth. 

Expects stabilisation ahead, FY16 budgeting pegs Rp at 14,500 

  • One bright spot is new tariffs on imported products. Imported chocolate confectionary now attracts 20% duties, vs. 5% in the past. This makes its local products even more competitive. 
  • Despite the higher cost structure of foreign brands, management does not see the ability to jack up pricing of its premium products (SilverQueen) as foreign brands are likely to absorb the duties in this environment. 
  • Petra is budgeting for 2016 with the Rp FX at 14,500. It is aiming to get GP margins back to 30%, plausibly with price hikes.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | 2015-11-13
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.79 Down 2.53