Results Update Current Price 12 May 2011 Fair Value Neutral S$0.405 S$0.41 Angelia Phua 65-62366-802 angelia.phua@nracapital.com Historical Chart Benefitted from lagged impact of price hike 2QFY11 results above our expectations. 2QFY11 PATMI of RM25.9m surged 100.5% YoY and 556.4% QoQ due to a one-off inclusion of negative goodwill of RM14.5m ensuing from the acquisition of PT Sentrafood and PT Sentraboga, an Indonesian instant noodle operations. Excluding this one-off item, 2QFY11 PATMI fell 11.4% YoY but surged 190.1% QoQ largely due to successful implementation of price hikes after the recent Lunar New Year in Malaysia at Dairies, which helped to absorb rising costs of key raw materials, in particular, milk powder, sugar and palm oil. As a result, Group GPM improved 3 percentage points QoQ but remained at 1.4 percentage points lower YoY. Improving revenue, which grew 44.5% YoY and 7.2% QoQ, as a result of improving sales performances of all five core divisons and profit contributions from newly acquired ready-to-drink and fresh bakery operations in Malaysia, further lifted the bottomline. 2HFY11 PATMI of RM15.4m (excluding oneoff item) amounted to about 52% of our FY11 estimate of RM29.6m and was above our expectations due to stronger-than-expected revenue growth as well as a seasonally stronger financial performance in the 2H compared to 1H. Source : Bloomberg Source: Bloomberg Stock Statistics Market Cap S$216.5m 52-HI S$0.53 52-LOW S$0.305 Avg Vol 319,378 Shares Outstanding 534.6m Free Float 168.3m Key Indicators ROE 35.7% ROA 15.1% P/BK* 2.3x Gearing* 1.3x *As at 31 Mar 2011 Major Shareholders Tan Family 52.15% Challenging operating environment. Supply disruption of raw materials due to adverse global climate and natural disasters are expected to result in further increase in raw material prices in the short term. In light of strong brand equity, we believe Etika will be able to successfully implement further price hikes to match rising costs of raw materials in the domestic markets. However, the Group is likely to continue to meet with price resistance in its key export market in West Africa with the recent weakness in domestic currency. Further, the recently acquired ready-to-drink operations in Malaysia which offers a higher margin, will also help to cushion overall margin pressure at Dairies. Other division. Packaging will continue to ride on growth in the Dairies. The strong Ringgit vs US dollar will mitigate the impact of higher costs of tin plates. Competition remains keen in Frozen Food but promising growth in higher-margin Butchery and Bakery business and the strong Ringgit will mitigate margin pressure. Faced with greater competition with the entry of US competitors into Australia and New Zealand (ANZ) and rising raw material costs, Nutrition will also come under margin pressure. However, new product innovation, coupled with price increases, will cushion against margin compression and help to retain its leading position in ANZ. Valuation and Recommendation. Etika has benefitted from a lagged impact of price hike in Dairies as evident in a 3 percentage point QoQ improvement in GPM in 2QFY11. In light of strong brand equity, we believe Etika will be able to successfully pass costs increases to customers through price adjustments. We are also expecting moderate revenue growth from organic growth and new businesses. We raised our core earnings estimate to -45.9% (FY11F) (previously -55.3%) but moderate the core earnings growth prospects for FY12 to +38.8% (previously +66.1%) as we expect the operating envirornment to remain challenging, followed by +34.8% (FY13F). We value Dairies at PER of 21x (FY12), Frozen Food :PER of 10x (FY12), Packaging :PER of 7x (FY12), Nutrition :PER of 16x (FY12) and Beverage : PER of 11x (FY12). We lowered the discount to valuation from 45% to 30% to account for the improving trend of GPM. Our valuation of 62.6Scts (previously 64Scts) accounted for the Ringgit weakness and dilutive impact of employee share option. Our target price of 41.0Scts (previously 35.5Scts) implies a PER of 15.7x (FY11), 11.3x (FY12) and 8.4x (FY13) on the core business. Neutral. page 1
Key Financial Data RMm YE 30 Sep FY09 FY10 FY11F FY12F FY13F Sales 600.3 677.7 891.8 970.6 1,039 Gross Profit 152.9 174.2 187.4 203.8 217.1 Net Profit 61.7 66.2 46.4 49.7 67.0 EPS (RM cents) 11.7 12.2 8.2 8.8 11.8 EPS growth (%) 54.3 4.8-33.0 7.1 34.8 PER (x) 8.4 8.0 12.0 11.2 8.3 DPS (RM cents) 3.4 2.6 1.8 1.9 3.6 Div Yield (%) 3.5 2.7 1.8 2.0 3.7 2QFY2011 Results Profit & Loss (RMm) YoY QoQ % % Year end: 30 Sep 2QFY11 2QFY10 Change 2QFY11 1QFY11 Change Revenue 221.2 153.1 44.5% 221.2 206.3 7.2% Cost of Sales (172.0) (116.9) 47.1% (172.0) (166.6) 3.2% Gross Profit 49.2 36.1 36.2% 49.2 39.7 24.0% Operating income 4.7 4.2 12.4% 4.7 3.7 28.1% Negative goodwill 14.5 - nm 14.5 - nm Operating Expenses (34.8) (23.1) 51.0% (34.8) (33.3) 4.6% Administrative expenses (9.2) (7.0) 30.5% (9.2) (9.3) -1.0% Selling & Marketing expenses (11.7) (8.0) 45.7% (11.7) (9.6) 21.8% Warehouse and distribution expenses (8.1) (7.3) 11.7% (8.1) (8.1) 0.9% Research & development expenses (0.4) (0.3) 49.5% (0.4) (0.4) 4.1% Other operating expenses (5.5) (0.5) 1038.8% (5.5) (6.0) -9.3% Impairment of goodwill - - nm - - nm Operating Profit 19.1 17.3 10.7% 19.1 10.0 90.1% Finance Costs (4.0) (1.7) 143.8% (4.0) (3.4) 17.3% Pre-tax Profit 15.1 15.6-3.4% 15.1 6.6 127.9% Income tax (3.1) (2.7) 12.6% (3.1) (3.3) -5.8% Minority interest (0.5) 0.1 nm (0.5) 0.6-186.1% Net Profit 11.5 12.9-11.4% 11.5 4.0 190.1% EPS - fully diluted (RMcts) 4.59 4.95-7.3% 4.59 0.75 512.0% page 2
Profit & Loss YE 30 September (RMm) 2009A 2010A 2011F 2012F 2013F Revenue 600.6 677.7 891.8 970.6 1,038.9 Cost of Sales (447.8) (503.5) (704.5) (766.8) (821.8) Gross Profit 152.9 174.2 187.4 203.8 217.1 Operating Income 6.8 9.5 17.1 25.7 28.2 Negative goodwill - - 14.5 - - Administrative expenses (30.2) (32.2) (37.3) (38.6) (38.0) Selling & Marketing exp. (24.7) (27.6) (40.5) (44.0) (47.1) Warehouse & distribution exp (22.0) (23.9) (34.0) (35.2) (36.9) Research & Development exp (1.0) (1.0) (1.7) (1.8) (1.9) Other operating expenses (2.9) (11.1) (22.3) (21.8) (21.0) Operating Profit 78.8 87.8 83.2 88.1 100.4 Net interest (7.4) (8.2) (18.7) (17.2) (14.9) Exceptional Items - - - - - Profits from Associated Co. - - - - - Pre-tax Profit 71.5 79.6 64.6 70.9 85.5 Income tax (9.8) (13.7) (17.3) (17.7) (14.5) Minority Interests (0.0) 0.2 (0.9) (3.5) (4.0) Net Profit 61.7 66.2 46.4 49.7 67.0 page 3
Balance Sheet YE 30 September (RMm) 2009A 2010A 2011F 2012F 2013F Cash & Fixed Deposit 28.5 30.2 44.2 48.9 55.9 Trade Receivables 105.9 134.3 171.0 191.5 204.9 Inventory 67.4 102.9 111.9 126.1 135.1 Other current assets 1.6 0.8 0.8 0.8 0.8 Current Assets 203.5 268.3 328.0 367.3 396.8 Property, Plant and Equipment 148.5 190.4 273.9 288.5 302.1 Others 27.8 39.4 122.9 122.9 122.9 Non-current Assets 176.3 229.8 396.8 411.4 424.9 Bank Borrowings 62.9 109.1 122.1 109.9 98.9 Bank OD 4.1 3.9 38.3 38.3 38.3 Trade Payable 67.0 68.1 121.6 151.3 168.9 Others 5.7 6.4 12.2 12.5 12.8 Current Liabilities 139.7 187.5 294.3 312.1 318.9 Bank Borrowings 58.6 83.8 165.7 157.4 141.7 Others 14.0 13.8 15.9 15.9 15.9 Non-current Liabilities 72.6 97.5 181.6 173.3 157.6 Shareholder's Equity 167.5 213.0 248.9 293.3 345.2 page 4
Cash Flow YE 30 September (RMm) Cash flow from Operating activities 2009A 2010A 2011F 2012F 2013F Pre-tax profits 71.5 79.6 64.6 70.9 85.5 Adjustments 21.4 24.7 19.2 32.7 30.1 Operating cash flow before working capital 92.9 104.3 83.8 103.5 115.6 Changes in working capital 24.0 (72.9) 10.0 (2.9) (3.0) Tax paid & others (8.6) (12.1) (16.2) (16.6) (13.4) Net cash generated from operations 108.3 19.3 77.6 84.0 99.3 Cash flow from investing activities Acquisition of subsi., net of cash (1.3) (27.5) (114.9) (5.7) (0.3) Property, plant & equipment (36.0) (22.6) (14.6) (24.3) (24.3) Others 0.5 0.2 0.6 0.9 1.5 Net cash from investing activities (36.8) (49.9) (124.1) (29.1) (23.0) Cash flow from financing activities Loans (31.4) 63.1 61.0 (21.4) (27.1) Others (24.8) (26.5) (33.7) (29.9) (38.5) Net cash from financing activities (56.3) 36.7 27.3 (51.3) (65.6) Net change in cash 15.2 6.1 (19.3) 3.6 10.6 Cash balance at beginning of year 7.8 23.4 25.3 5.9 10.6 Other adjustments 0.4 (4.2) (0.2) 1.1 (3.6) Cash balance at end of year (net of OD & adjms) 23.4 25.3 5.9 10.6 17.6 page 5
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