Petra Foods - CIMB Research 2015-12-09: Needs Indonesia to find its footing

Petra Foods - CIMB Research 2015-12-09: Needs Indonesia to find its footing PETRA FOODS LIMITED P34.SI 

Petra Foods - Needs Indonesia to find its footing 

  • Quarterly core profit has slumped to its worst since the Asian Crisis. 
  • Chief blame lies in the Rp’s plunge. Inflation rose, impacting consumer sentiment. Shops thinned out inventory on poor sales. Margins was hit by rising US$ costs 
  • Management has moved to reclaim its traditional 30% gross margins, by hiking selling prices to pass on the higher costs. A stable or rising Rp would help greatly. 
  • We have a Reduce rating with target price of S$1.79 based on 25x CY17 P/E. 

■ Indonesia sales have fallen in worryingly quantum 

  • Petra Foods’ Indonesia sales and profitability started going on a downtrend in 2Q15. Things got progressively worse in 3Q15. Indonesia sales was -21%yoy in local currency terms, as consumers were hit by rising inflation when the Rp nosedived again. 
  • Poorer sales and a decline in gross margins had an outsized effect on core profits, even if we ignore one-offs. 

■ Indonesia margins affected, price hikes implemented 

  • 3Q gross margins have fallen to 28% vs. a more normal 31-32% usually. Petra initially resisted passing on higher US$ costs and suffered in the quarter, before it implemented 3-4% price hikes in late August. 
  • We expect margins to improve, post-price hikes and especially as the Rp has rebounded and looks more stable recently. 
  • 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 

  • The bright spot is that it has done very well in a second key market after Indonesia. 
  • The business started from it buying local brand Goya and Petra has grown that from a singledigit market share to a double-digit share. 
  • The success of the Philippines probably spurred management’s decision to focus resources on core markets. 
  • In 2014-15, Petra culled several third-party distribution business to focus on its core markets and brands. 

■ 2016 could see its M&A search in China throw up something 

  • After selling off its ingredients business, the intention all along was to look for a third market to grow its chocolate business. 
  • China has been identified as one such market. The market has all the right characteristics to see a period of strong growth in the next 5- 10 years, and there is no clear leading brands yet. 
  • With the settlement of the Barry Callebaut case, management can focus on leaping into its third core market in 2016. 

■ Will do well if Rp stabilises, 2016 budgeting pegs RP at 14,500 

  • The lynchpins of the consumer business has always been its heritage brands and its distribution network in Indonesia. However, those strengths are nullified when the Rp keeps falling and the Indonesia consumer is under duress, like in 2015. 
  • We see a better 2015 on the premise that the Rp stabilizes, once President Jokowi’s plans for infrastructure building gets rolled out and jobs are created.

Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09
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