• 1Q14 reported results affected by weaker currencies
• Higher costs passed on to consumers
• Maintain BUY with S$4.06 FV

1Q14 reported results appears disappointing

Petra Foods’ 1Q14 reported results for continuing operations appears disappointing because of weaker regional currencies against USD on a YoY basis. In particular, an average of 24% YoY decline in IDR against the USD in 1Q14 has a major unrealised translational impact as Petra Foods derives bulk of its revenue (72% in 1Q14) from Indonesia. Correspondingly, reported 1Q14 revenue declined 3.6% YoY to US$122.7m, forming 21.0% of our FY14 forecast. Reported PATMI declined 1.6% to US$13.9m, making up 19.2% of our forecast. However, in constant currency terms, growth continues to be robust as 1Q14 revenue and PATMI increased by 15.7% and 14.8% respectively.

Margin maintained despite higher raw material cost

As raw materials such as cocoa, milk and sugar are denoted in USD, weaker regional currencies meant costs are higher. In order to protect gross profit (GP) margin, which management said is their priority over volumes, Petra Foods adjusted selling prices and product sizes over their portfolio of ~700 Stock Keeping Units (SKU). The exercise appeared to be successful as GP margin remained steady at 31.9% (vs 32.0% in 1Q13). Furthermore, the pricing adjustments did not adversely affect demand as1Q14 Own Brands sales grew 16.0% in constant currency terms. We think this is a display of Petra Foods’ ability to pass on higher costs to consumers.

Focus on fast-growing Philippines and Indonesia markets

Management is optimistic that the Philippines and Indonesia markets will grow at 15% over the coming years in local currency terms. As such, capex of US$30m/year is expected for the next three years to increase production capacity. Petra Foods will continue to widen its distribution network (expected +10% for Indonesia and +20% for Philippines) as well as increase product offering (+20SKU per year). We lower our FY14F USD-denominated revenue growth forecast from 15% to 10% as IDR remains depreciated YTD relative to 1H13. Based on 28x blended FY14/FY15F EPS, we maintain BUY with new fair value estimate of S$4.06 (previous: S$4.08).

Source: OCBC Research - 9 May 2014