Petra Foods - CIMB Research 2016-02-23: Returning excess cash to shareholders

PETRA FOODS LIMITED P34.SI

Petra Foods - Returning excess cash to shareholders

Key highlight of 4Q15 results – the return of US$60m cash to shareholders.
Cash return represents 13.74 Scts or one-off yield of 5.8%. Ex-cash return, Petra Foods trades at 30.8x CY16F P/E, not cheap given the headwinds.

Mild positive signs operationally. Posted core operating profit in 4Q15 as gross margins recovered and yoy sales decline was more muted vs. 3Q15.
Maintain Reduce. Special dividend a nice surprise but with 4Q15 core earnings at US$0.8m, there is work to do to meet consensus’ US$28m FY16 profit expectations.

FY15 profit was below our expectations (93% of FY15) but above consensus (139%). Indonesia’s consumer spending continued to be dogged by the slowing economy and inflationary conditions.
The good thing is that the Rp recovered from an exchange rate of 14,600 (end-3Q) to 13,900 (end-4Q) and Petra’s yoy sales decline was less ugly than in 3Q.
Petra’s 4Q15 Indonesia sales declined 12% in local currency terms, still poor but certainly much better than the 21% yoy plunge in 3Q15.

While Indonesia’s performance improved slightly, growth in the overall regional market was slower.
Regional markets (mostly, the Philippines) saw 4Q15 sales in local currency terms shrunk 13% yoy. The decline was due to the cessation of the Singapore distribution business in mid-2015 but even excluding that, regional markets’ 10% yoy growth in local currency terms was below earlier growth rates of 20-30%.

4Q15 gross margins recovered back to above 30%, showing the effect of price hikes in Indonesia in Aug/Sep. However, 4Q15 EBITDA margins (5.5%) remained fairly lacklustre on the back of:
1. lack of sales and hence, negative operating leverage,
2. increases in raw materials and packaging costs due to the weak Rp, and
3. higher trade promotion expenses.
These factors were carried over from 3Q15 and not new.

The most noteworthy development was the decision to return excess cash of US$60m back to shareholders, equivalent to about half its cash pool or S$0.137 per share. The cash return came after the settlement of the Barry Callebaut claims in 3Q15.
In our opinion, this could represent management’s restrain in executing its China expansion plans after doing due diligence for the past year or so.

The cash return represents a one-off special dividend yield of 5.8%. Ex-payout, valuations are still at a lofty 30.8x CY16F P/E.
Beyond the special cash payout hype, Petra Foods needs to show it can recover to its earlier profit run-rates.
With 4Q15 core net profit at S$0.8m, it is still far from gaining the momentum to achieve the market’s expectation of US$26m-32m profit for FY16.
Our target price (25x CY17F P/E, historical average) is trimmed marginally to reflect the slight EPS cuts (S$1.77).

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2016-02-23

CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.77 Down 1.79