3Q15 results were below expectations, with profit plunging into the red, even excluding a one-off USD19.5m charge following the dispute settlement with Barry Callebaut. With the alarming decline in volumes and persistent regional currency weakness, we do not think there will be a quick turnaround. Maintain SELL with a lower DCF-derived TP of SGD2.00 (from SGD2.50, 25% downside).
■ Profit plunges into the red for 3Q15
Petra Foods recognised a onetime loss of USD19.5m, following the dispute settlement with Barry Callebaut. This reverses part of the earlier USD67.6m gain, following the sale of its cocoa ingredients business in 2013. Even excluding this item, PATMI came in at -USD1.2m for the quarter. This was largely on the back of demand weakness and IDR depreciation in its core market Indonesia.
■ Alarming decline in revenue
3Q15 revenue in USD terms was down 28% YoY. In local currency terms, revenue in its core market Indonesia was down an alarming 21% YoY. We believe it was a function of weaker consumer demand as well as distributors cutting back on inventory in light of the economic and currency uncertainties. Regional markets fared better in terms of volume, but USD revenue was still down 17% YoY, which we believe was largely due to the Malaysian market.
■ Unlikely to improve in 4Q15
As a result of higher promotional activities and higher USD-input costs, gross margins reduced to 28% this quarter from 32% in 3Q14. We do not expect this situation to turn around quickly, considering the IDR’s persistent weakness. Price increases will also take time to pass through without affecting volumes.
■ Maintain SELL
Following the payment of USD39m to Barry Callebaut to settle the dispute, the company is still in a net cash position of USD43m, which should help it withstand the current situation. We now only expect a marginal profit for FY15, and slashed our FY16-17 profit estimates by 25%. The company is still potentially liable for another USD12.8m as notified by the Brazilian tax authorities as part of the same cocoa ingredient business sale, though Petra intends to contest this. (Read Report)
Read Related Reports
1) Petra Foods - Keeping a cautious stance on the stock by OCBC Investment Research, published on 16 November 2015
2) Petra Foods - Settlement amid tough markets by CIMB Research, published on 13 November 2015
Source : RHB Research