• Usual headwind lies ahead
• Positive underlying business growth
• Downgrade to HOLD

Currency depreciation could still be a drag

Looking back, the group had suffered a drag from IDR depreciation on its 3QFY14 topline. Based on OCBC Treasury Research's latest forecasts, IDR is set to continue weakening against the USD this year by about 4.3% YoY to USD-IDR of 12972 by Dec-15. The street is currently expecting a marginal drop YoY for its FY14 revenue as well as a 14% loss YoY for FY14 PATMI. Notably, in constant currency terms, sales have been achieving double-digit growth rates and we think the underlying business should continue to perform well. The consensus is keeping a positive note on the business going forward, with expectations for sales growth in the mid-teens. This seems reasonable, in view of the supportive macro environment in Indonesia and Philippines.

Steady margins seem achievable

While the group will likely see a dip in margins for FY14, we believe in the group's focus on margins improvement. Besides pricing adjustments and product rightsizing initiatives, we keep in mind that Petra Foods is still in their five year deal with Barry Callebaut, wherein they are able to lock up 70% of their raw materials' requirements such as cocoa, milk and sugar. Barry Callebaut supposedly has to match the lowest viable price sourced by Petra Foods and this should naturally help stabilize its gross profit margin (FY13: 30%) until 2018. The group had also removed agency brands that were cumbersome and adverse to overall profitability.

Downgrade to HOLD following share price runup

Petra Foods’ share price has had a good run-up over recent months, and is up 6.84% YTD. We note that the counter is currently trading at 34.4x, slightly more than one standard deviation above its two-year average P/E. Following a change in analyst coverage and in consideration of the abovementioned, we arrive at a revised fair value estimate of S$3.86 (previous: S$4.16) based on a target P/E of 30x (approximately equivalent to its two-year average PER) and lower earnings estimates. We downgrade to HOLD; upside risks include potential catalysts arising from the following events: 1) the group reaches a settlement on the dispute with Barry Callebaut over the transaction of disposal of its Cocoa Ingredients business, or 2) Petra Foods uses its net cash pile to buy a brand or a new product category to enhance its product offerings.

Source: OCBC Research - 11 Feb 2015