Petra Food - DBS Research 2016-02-24: Worst seen; recovery to take time

PETRA FOODS LIMITED P34.SI

Petra Food - Worst seen; recovery to take time

Upgrade to HOLD, TP revised to US$2.21 (inclusive of 13.7 Scts/share capital reduction)

We believe the worst could be over, though recovery of earnings to FY14 levels will take some time.
We are projecting earnings of US$28m/ US$42m for FY16F/17F, implying a (pre-exceptional) growth of 82%/50%, on the back of improving sentiment in Indonesia, helped by a more stable IDR.
Our TP is adjusted up to S$2.21, still based on average PER (26x) on FY16F/17F earnings, inclusive of the estimated 13.7 Scts/share capital reduction.

Petra’s 4Q15 were marginally below our expectations, which we believe was a kitchen-sinking quarter. 4Q15 net profit ended at US$0.8m down (-94% y-o-y) from US$12.3m a year ago.
The weak economic outlook and consumer sentiment in Indonesia have caused sales in Indonesia to decline by 24% y-o-y (-11.8% in constant currency) to US$73.2m in 4Q15; and a continuation of the trend, albeit smaller, seen in 3Q15. This was attributed to the de-stocking by distributors and retailers in view of the uncertain outlook.
Management opines that they are cautiously optimistic in that this de-stocking process should be nearing its end, if not already passed it.

The capital reduction equates to 9.82 US cts. This was not surprising to us, given that the Group has been in a net cash position.
We believe the payout and expectations that earnings decline has passed should provide support for share price. That said, we are not ready to turn positive on the counter given its high valuation at 37x/ 25x FY16F/17F PE.
Upgrade to HOLD.

Our TP is raised to S$2.21 as we peg to FY16F/17F earnings, coupled with the expected capital reduction amounting to 13.7 Scts/share.

Earlier-than-expected earnings recovery. An earlier-than-expected earnings recovery will give rise to upside earnings risk.

Andy Sim DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2016-02-24

DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 2.21 Up 2.05