Petra Foods Limited. Long-term BUY. Branded Consumer - consistently delivering. 1QFY13 Results Update 20 May 2013.

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1 1QFY13 Results Update 20 May 2013 Long-term BUY Current Price Fair Value Stock Statistics S$4.30 S$4.41 Market cap S$2,628.2m 52-low S$ high S$4.35 Avg daily vol 225,841 No. of share m Free float 43.1% Key Indicators ROE 13F 19.5% ROA 13F 8.0% P/BK* 6.8x Gearing* 2.0x *as at 31 Mar 2013 Major Shareholders John Chuang 51.06% Aberdeen Asset Mgmt plc 9.66% Source: Bloomberg Historical Chart Branded Consumer - consistently delivering Strong 1QFY13 performance at Branded Consumer were in line; steeper than expected losses at Cocoa Ingredients. 1QFY13 results sank into the red, as expected, with losses of US$14.1m weighed down by US$29.0m losses in Cocoa Ingredients largely due to margin pressures as well as inventory provision and write-down of US$6.3m associated with the proposed disposal of Cocoa Ingredients. Branded Consumer continued to shine with 1QFY13 EBITDA growth of 20.1% YoY to US$21.7m but fell 6.0% QoQ due to the seasonally strong 4Q festive period. The strong performance was led by strong sales of Own Brands (+10.3% YoY and +19.8% QoQ) in the key markets of Indonesia and the Philippines which achieved double-digit revenue sales growth, higher sales mix of higher-margin Premium products as well as lower input costs through locking-in favourable forward costs of raw materials. As a result, gross profit margin (GPM) rose 2.0% points YoY and 1.8% point to 32.5% in 1QFY13. 1QFY13 Branded Consumer PATMI was largely in line with our expectations but losses from Cocoa Ingredients was steeper than expected and we have revised lower our FY13 earnings accordingly. Turning net cash positive despite gradual erosion of Group gains from losses in Cocoa Ingredients. The processing of regulatory and operational procedures for the proposed divestment of Cocoa Ingredients is on track for the completion of the proposed divestment by July Pending completion, Cocoa Ingredients is expected to incur steeper losses as a result of margin compression ensuing from oversupply of processing capacity over the rest of FY13. As losses will be funded by increasing bank borrowings until the proposed divestment is complete, these losses will continue to reduce the Group s disposal gains and net cash proceeds, estimated at US$68.0m and US$214.0m respectively. Notwithstanding that, Petra will be in a net cash position following the proposed divestment. Expand to new chocolate-related product categories for further lift in Branded Consumer. The proposed disposal of Cocoa Ingredients will free up capital for Branded Consumer to seize growth opportunities in the fast growing regional consumer markets particularly in Indonesia and the Philippines where Petra already has a strong presence. To support organic growth and expand market share, Petra will continue to launch new products, expand into new product categories and expand manufacturing capabilities for Own Brands, broaden existing distribution network, as well as distribute higher-yielding Agency Brands. Its pricing power, packaging strategies and pro-active costs management and hedging of key raw material prices will ensure GPM remains healthy and stable at a minimum of 30%. In addition to strengthening the core Branded Consumer business, Petra will seek new opportunities in chocolate-related product categories such as wafer, biscuits, beverage, to further spearhead growth in Branded Consumer to higher levels. Management guided that impact from legal tussle with Nestle is immaterial. The legal suit between Nestle and Petra over the latter s infringement of Nestlé s Singapore trade mark registration for 2 Wafer Finger shape and 4 Wafer Finger shape arising from the sale of Petra s Delfi Take-It chocolate wafer product is ongoing and is likely to take years to resolve. As the sale of Delfi Take-It in Singapore constitutes less than 0.1% of Branded Consumer s FY12 sales of US$477.7m (or about US$50,000 of the division s FY12 PATMI) and legal costs is expected to be modest, management guided that there will be no material operational and financial impact to Petra arising from Nestlé s claims. Angelia Phua (+65) angelia.phua@nracapital.com Valuation and Recommendations. We largely maintain our earnings forecast for Branded Consumer and are expecting strong earnings growth of 24.7% (FY13F) and 23.7% (FY14F). To align with re-rating of industry peers, we value Branded Consumer at 22x PER (FY14F) (previously 19x PER (FY14F)) and assuming further capital allocation for the long-term growth of Branded Consumer, we arrive at a fair value of S$4.41 (previously $4.16). Shareholders are also likely to be rewarded with a special dividend in FY13 after the proposed disposal of Cocoa Ingredients is complete. Maintain Long-term BUY.

2 Key Financial Data (US$ m, FYE Dec) 2010* F 2014F Sales 1, Gross Profit Net Profit EPS (cents) EPS growth (%) (57.2) PER (x) NAV/share (cents) DPS (cents) Dividend Yield (%) *FY10 numbers are for both continuing and discontinuing operations page 2

3 Results comparison 1QFY2013 Results Profit & Loss (US$m) YoY YoY Year end: 31 Dec 1QFY13 1QFY12 % Change 1QFY13 4QFY12 % Change Revenue % % Cost of Sales (86.0) (82.2) 4.6% (86.0) (82.1) 4.7% Gross Profit % % Operating income % % Operating Expenses (22.1) (20.1) 9.9% (22.1) (17.0) 29.7% Selling & Distribution expenses (17.8) (16.6) 7.4% (17.8) (13.2) 35.0% Administrative expenses (4.0) (3.4) 18.6% (4.0) (3.8) 4.9% Other operating expenses (0.3) (0.2) 64.9% (0.3) (0.1) 344.0% Operating Profit % % Finance Costs (0.3) (0.4) -19.9% (0.3) (0.3) -1.7% Associates & jointly controlled entities 0.1 (0.0) nm % Pre-tax Profit % % Income tax (5.2) (4.0) 28.9% (5.2) (6.0) -13.6% Minority interest % % Net Profit - Continuing operations % % EPS (UScts) % % Discontinued ops, net tax bef EI (26.8) 4.6 nm (26.8) (17.4) 54.2% Exceptional item (2.1) - nm (2.1) (14.0) -84.7% Discontinued ops, net tax after EI (29.0) 4.6 nm (29.0) (31.4) -7.8% EPS (UScts) (4.74) 0.75 nm (4.7) (5.14) -7.8% Combined net profit/(loss) after tax (14.9) 16.3 nm (14.9) (16.7) -10.9% Combined EPS (UScts) (2.43) 2.67 nm (2.4) (2.73) -11.0% Source: Company, NRA Capital page 3

4 Profit & Loss YE 31 December (US$m) 2010A* 2011A 2012A 2013F 2014F Revenue 1, Cost of Sales (1,366.4) (291.4) (325.3) (382.1) (467.1) Gross Profit Operating Income and Other gains Selling & distribution costs (84.5) (60.1) (61.1) (63.8) (67.1) Administrative expenses (35.3) (12.1) (14.4) (16.7) (17.2) Other operating expenses (1.4) (1.8) (0.8) (0.8) (0.9) Operating Profit Net interest (25.6) (1.7) (1.3) Profits from Associated Co Pre-tax Profit Income tax (14.0) (15.5) (21.6) (45.5) (29.8) Minority Interests Net Profit - continuing operations Net Profit/(Loss)- discontinuing operations (28.6) (67.6) - Combined Net Profit *FY10 numbers are for both continuing and discontinuing operations page 4

5 Balance Sheet YE 31 December (US$m) 2010A 2011A 2012A 2013F 2014F Cash Trade Receivables Inventory Other current assets Disposal group classified as held-for-sale Current Assets , Property, Plant and Equipment Others Non-current Assets Bank Borrowings Bank OD Trade Payable Others Liability directly assoc with disposal group Current Liabilities Bank Borrowings Others Non-current Liabilities Shareholder's Equity page 5

6 Cash Flow YE 31 December (US$m) Cash flow from Operating activities 2010A 2011A 2012A 2013F 2014F Pre-tax profits Adjustments Operating cash flow before working capital Changes in working capital (147.9) (1.3) (54.2) (0.7) Tax paid & others (21.9) (22.3) (22.2) (45.9) (29.8) Net cash generated from operations (57.4) Cash flow from investing activities Property, plant & equipment (13.5) (52.4) (53.6) (31.5) (25.0) Others (12.5) Net cash from investing activities (26.0) (51.1) (53.2) (19.2) Cash flow from financing activities Loans (408.4) 1.2 Dividend (12.7) (21.8) (25.8) (24.3) (99.7) Others 32.9 (29.1) (32.3) (4.6) (3.9) Net cash from financing activities (40.9) 42.5 (437.2) (102.4) Net change in cash (33.4) Cash balance at beginning of year (28.0) (4.6) Other adjustments 5.4 (0.9) (0.4) Cash balance at end of year (net of OD) (4.6) page 6

7 NRA Capital Pte. Ltd ( NRA Capital ) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX- ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST. page 7