Petra's 3Q14 results came in below expectations, partly due to the forex effect.  Maintain  BUY  with  a  reduced  DCF-based  TP  of  SGD4.25  (15% upside).  9M14  PATMI  of  USD37.6m  made  up  63%  of  consensus estimate.  Despite  ongoing  challenges,  we  believe  Petra  remains  in  a sweet  spot  to  capture  sales  in  ASEAN's  two  biggest  growth  markets.Having highlighted IDR weakness as a key risk earlier, we cut our FY14-16 earnings forecasts by 11-14%. 

Results  adversely  impacted  by  IDR  depreciation.  Petra  Foods' (Petra)  3Q14 revenue declined 6.5% YoY, while recurring profit declined 29%  YoY  to  USD10.6m.  During  the  quarter,  the  IDR  declined  around 13%  on  average  YoY.  This  had  both  actual  as  well  as  translational impact  on  operating  margins.  On  a  constant  exchange  rate  basis,  net profit fell by 18.7% mainly as a result of higher operating expenses. 

3Q14 revenue flattish.  The weak 4% YoY growth  in Indonesia sales in IDR  terms  was  attributed  to  seasonality.  Lebaran  festive  sales  werealready  captured  in  2Q14,  vs  in  third  quarter  last  year.  On  a  9MYTD basis,  sales  growth  in  IDR  terms  remained  strong,  up  15%  YoY.  A reduction  of  agency  brands  also  impacted  sales,  especially  in  the regional  markets.  We  believe  this  is  a  conscious  decision  to  focus  on core  brands.  Management  revealed  that  revenue  from  the  Philippines grew more than 17% YoY, excluding discontinued agency brands.

Stable  gross  margin  but  higher  operating  costs.  Petra's  forward purchase programme has worked well with  its gross margin  maintained at  31.7%  despite  higher  cocoa  prices  YoY.  However,  selling  and distribution  costs  are  likely  to  increase  further  as  Petra  continues  to invest  in  its  distribution  infrastructure  and  warehouse.   On  a  9MYTD basis, EBITDA margin has declined about 100bps.  

Maintain BUY with a lower TP of SGD4.25. IDR depreciation remains akey  investment  risk.  We cut our  FY14-16 earnings forecasts  by  11-14% and reduce our DCF-derived TP to SGD4.25  from SGD4.50, implying  a 31.4x  FY15F P/E. We now expect  a net profit CAGR of 25% over FY15-16, driven mainly by continued growth in existing markets.

 

Source: OSK-DMG