A potential inflection point may be emerging for Petra Foods as a result of a possible slowdown in consumer demand growth in Indonesia and a larger-than-expected loss from its cocoa ingredients segment in 2Q13. For the former, the suggested removal of fuel subsidies could adversely affect consumer spending due to the higher level of dependency by the lower-income groups, which make a larger proportion of the population. In addition, Petra could experience greater cost pressures related to distribution, etc. For the latter, a larger-than-expected loss could materialize as other cocoa processors in the industry have issued profit warnings recently, and this could lead to a bigger drag for Petra in terms of its FY13 performance. Therefore, with an unchanged fair value estimate of S$3.88 and together with the sharp share price gains seen YTD, on valuation grounds we are downgrading our rating to SELL.
Stock price has cooled slightly since results
Petra Foods’ share price dipped slightly by 2.4%, since the release of its 1Q13 results which were below our expectations. Although this pales in comparison to its YTD return of 22.4%, we feel that it a potential inflection point may be emerging.
Threat to Branded Consumer growing
As a recap, Petra experienced slower growth in 1Q13 for its Branded Consumer division relative to the previous quarters (revenue came in higher by 7.7% YoY but this was at least 5ppt lower compared to the previous three quarters), and this was in line with the lower-than-expected increase in retail sales growth for its primary market of Indonesia. While the outlook remains favourable for the country, a potential hike in fuel prices (via removal of subsidies) may derail consumption growth patterns in the coming quarters. Although the government has pledged compensatory payments for lower-income groups, the payments may be insufficient to offset the high level of dependency by this consumer base. In addition, higher fuel costs may lead to greater cost pressures related to distribution. While the ability of the government to proceed may be hindered by strong public protests, the overhang could see consumer spending cut in favour of savings.
(Larger) drag from cocoa segment?
Petra is to record a final 2Q13 loss from its divested cocoa ingredients segment but the amount of loss may be higher than the street had anticipated. The difficulties experienced by the industry seem to have been exacerbated lately as evidenced by profit warnings from other cocoa processors.
Exercise prudence; downgrade to SELL
While we like Petra for its exposure to emerging Asia consumer demand, the risk of price downside looms due to some of the factors mentioned above. As such, with an unchanged fair value estimate of S$3.88 and together with the sharp share price gains seen YTD, on valuation grounds we are downgrading our rating to SELL.
Petra Foods’ share price dipped slightly by 2.4%, since the release of its 1Q13 results which were below our expectations. Although this pales in comparison to its YTD return of 22.4%, we feel that it a potential inflection point may be emerging.
Threat to Branded Consumer growing
As a recap, Petra experienced slower growth in 1Q13 for its Branded Consumer division relative to the previous quarters (revenue came in higher by 7.7% YoY but this was at least 5ppt lower compared to the previous three quarters), and this was in line with the lower-than-expected increase in retail sales growth for its primary market of Indonesia. While the outlook remains favourable for the country, a potential hike in fuel prices (via removal of subsidies) may derail consumption growth patterns in the coming quarters. Although the government has pledged compensatory payments for lower-income groups, the payments may be insufficient to offset the high level of dependency by this consumer base. In addition, higher fuel costs may lead to greater cost pressures related to distribution. While the ability of the government to proceed may be hindered by strong public protests, the overhang could see consumer spending cut in favour of savings.
(Larger) drag from cocoa segment?
Petra is to record a final 2Q13 loss from its divested cocoa ingredients segment but the amount of loss may be higher than the street had anticipated. The difficulties experienced by the industry seem to have been exacerbated lately as evidenced by profit warnings from other cocoa processors.
Exercise prudence; downgrade to SELL
While we like Petra for its exposure to emerging Asia consumer demand, the risk of price downside looms due to some of the factors mentioned above. As such, with an unchanged fair value estimate of S$3.88 and together with the sharp share price gains seen YTD, on valuation grounds we are downgrading our rating to SELL.
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