Etika International Holdings Ltd. 3QFY13 Results Update. 20 August 2013.
Further delays in production hinder takeoff in export drive. ▫. Weaker than
expected ...
Etika International Holdings Ltd Outperform Current Price
S$0.395
Fair Value Up / (downside)
S$0.425 +7.6%
Further delays in production hinder takeoff in export drive
Weaker than expected 3QFY13 PATMI due to operational issues at new plants. 3QFY13 PATMI of RM0.7m fell 84.8% YoY on the back of a 0.1% dip in revenue to RM254.5m. The weaker than expected result was due to delay in the commencement of commercial production of sweetened condensed milk (SCM) in the Surabaya plant as well as operational issues that impeded the new beverage plant in Hawkes Bay, New Zealand from achieving the targeted sales level. Although lower raw material costs (-2.0% YoY), particularly from sugar and milk powder, lifted gross profit (+7.3% YoY) to RM55.9m and gross profit margin (GPM) by 1.5% points to 21.9%, higher administrative (+14.3% YoY) and selling & marketing expenses (+37.2%) incurred in anticipation of higher production in Surabaya, further weighed on the bottomline. On a QoQ basis, 3QFY13 PATMI fell 85.3% despite an 8.6% rise in revenue arising from volume growth in both local and export markets as well as modestly firmer selling prices for exports. Higher costs of sales (+11.4% QoQ) due to higher raw material costs in other non-dairy divisions pressured GPM 2.0% points QoQ lower while higher operating costs (+5.0% QoQ) weighed on the bottomline. 9MFY13 PATMI of RM14.2m accounted for about 57% of our FY13 estimates of RM24.8m. In view of poorer than expected sales target achieved at the Hawkes Bay plant and instant noodle operations at PT Sentrafood Indonusa (PTSI), and in anticipation of further production delays in the Surabaya plant, we further lower our FY13 forecast.
Start of commercial production at the new Surabaya SCM plant will support export drive. In the short-term, the weaker Ringgit versus US dollar bodes well for Dairies’ export sales but the potential entry of a new player in Malaysia next year may pressure selling prices in the local market. In the medium to longer term, as licensing issues are resolved and Etika commences commercial production at the SCM plant in Surabaya, the additional 15% capacity will support Etika’s regional export drive and cushion weakness in export volume particularly to Africa.
Looking to grow in Other divisions. Trading and Frozen Foods remain vulnerable to margin pressure ensuing from higher raw material costs. However, this will be cushioned by scaling-up efforts at the Butchery operations as a result of growing demand from international fast-food chains and the closure of a loss-making FMCG unit. The outlook for Nutrition remains subdued with intense competition from US products and weaker consumer sentiment in Australia and New Zealand (ANZ). However, an anticipated strength in USD is likely to reduce the influx of US product into ANZ and a new distribution access into a leading supermarket chain in NZ will further protect and grow the market share. On a weaker note, the new UHT Aseptic bottling plant in Hawkes Bay is not likely to meet sales target in the shorterterm in view of the recent food safety concerns in NZ but we believe consumer confidence and demand will be restored over time. Others will benefit from strong export demand for energy drinks to China but losses at noodle manufacturer PTSI will continue to weigh on divisional bottomline in FY13 and potentially into FY14. PTSI is currently undergoing further operational review by Management. Scaling-up efforts at “Texas Chicken” fastfood restaurant was ahead of target and currently, a total of five stores are operational with two more expected to open by end-FY13. We are expecting the Group to turn profitable in the franchise business by FY14.
Valuation and Recommendation. In view of short-term headwinds facing the Surabaya and Hawkes Bay plants, Etika is likely to benefit from scaling-up efforts in FY14, later than our earlier estimate of 4QFY13. Vulnerability to fluctuating raw material prices could also potentially weigh on margins. We have further lowered our earnings forecast and are expecting core earnings to decline 23% (FY13F) (previously +12%) lifted by capacity expansion for SCM in Indonesia, followed by growth of 66% (FY14F) (previously +40%) from scaling-up efforts in Indonesia and UHT Aseptic bottling plant in Hawkes Bay. To reflect industry re-rating, we raise our valuation on Dairies to PER of 23x (FY14F) (previously PER of 22x (FY14F)) which is still conservative relative to industry PER of 25x (FY14F), and maintain the valuation for Frozen Foods at PER : 7x (FY14F), Nutrition :PER of 13x (FY14F). With improved liquidity, we remove the 10% liquidity discount and arrive at a target price to 42.5Scts (previously 46.5 Scts). Etika’s export drive will bear fruit in the longer-term. Long-term BUY.
Stock Statistics Market cap 52-low 52-high Avg daily vol No. of share Free float
S$242.4m S$0.175 S$0.505 2,315,277 613.6mil 30.2%
Key Indicators ROE 13F ROA 13F P/BK* Gearing*
6.7% 2.0% 2.27x 1.36x
*As at 30 Jun 2013
Major Shareholders Tan Brothers Tee Yih Jia Food Mfg
29.56% 12.55%
Historical Chart
Source: Bloomberg
Angelia Phua (+65) 6236-6802
[email protected] www.nracapital.com
3QFY13 Results Update 20 August 2013
Etika International Holdings Ltd Key Financial Data (RM m, FYE Sep)
2011
2012A
2013F
2014F
2015F
Sales
879.6
984.8
964.8
1,082.6
1,163.6
Gross Profit
180.5
204.6
220.0
248.5
273.0
28.8
22.0
16.8
27.9
39.7
Net Profit EPS (cents)
5.0
4.1
2.8
4.6
6.5
(58.9)
(18.8)
(30.9)
62.3
42.4
PER (x)
20.2
24.9
36.1
22.2
15.6
NAV/share (cents)
41.8
42.5
45.2
48.3
52.1
DPS (cents)
2.9
2.0
1.2
2.4
2.9
Dividend Yield (%) Source: Company, NRA Capital estimates
2.9
1.9
1.2
2.4
2.9
EPS growth (%)
Results comparison 3QFY2013 Results
Profit & Loss (RMm) 3QFY13
3QFY12
% Chg
3QFY13
2QFY13
QoQ % Chg
254.5
254.8
-0.1%
254.5
234.4
8.6%
(198.6)
(202.7)
-2.0%
(198.6)
(178.3)
11.4%
55.9
52.1
7.3%
55.9
56.1
-0.4%
Operating Expenses
(45.4)
(39.1)
15.9%
(45.4)
(42.6)
6.5%
Administrative expenses
(14.1)
(11.8)
20.1%
(14.1)
(11.5)
22.6%
Selling & Marketing expenses
(20.5)
(14.9)
37.2%
(20.5)
(18.5)
Warehouse and distribution expenses
(10.2)
(11.6)
-12.2%
(10.2)
(11.7)
10.7% 12.9%
(0.7)
(0.7)
9.4%
(0.7)
(0.7)
2.5%
0.2
(0.1)
nm
0.2
(0.1)
Operating Profit
10.5
12.9
-18.9%
10.5
13.5
nm 22.1%
Finance Costs
(6.4)
(6.1)
4.9%
(6.4)
(6.4)
Pre-tax Profit
4.1
6.8
-40.3%
4.1
7.1
(3.8)
(2.4)
61.7%
(3.8)
(2.8)
Minority interest
0.5
0.3
59.9%
0.5
0.6
Net Profit
0.7
4.8
-84.8%
0.7
4.9
0.12
0.83
nm
0.12
0.85
Year end: 30 Sep Revenue Cost of Sales Gross Profit
Research & development expenses Other operating expenses (net)
Income tax
EPS - fully diluted (RMcts)
YoY
1.0% 42.7% 35.9% 23.0% 85.3% 85.9%
Source: Company, NRA Capital
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Etika International Holdings Ltd Profit & Loss YE 30 September (RMm) 2011A
2012A
2013F
2014F
2015F
879.6
984.8
964.8
1,082.6
1,163.6
(699.1)
(780.2)
(744.8)
(834.1)
(890.6)
180.5
204.6
220.0
248.5
273.0
Operating Income
4.0
3.8
3.6
3.9
4.1
Negative goodwill
10.5
-
-
-
-
Administrative expenses
(52.9)
(46.0)
(50.7)
(53.4)
(56.3)
Selling & Marketing exp.
(44.1)
(59.3)
(72.6)
(80.7)
(86.7)
Warehouse & distribution exp
(33.3)
(38.8)
(44.9)
(46.8)
(49.3)
Research & Development exp
(1.7)
(2.3)
(2.9)
(3.2)
(3.4)
Other operating expenses
(8.3)
(6.4)
(1.2)
(1.3)
(1.4)
Operating Profit
54.8
55.6
51.3
67.1
80.0
(20.6) -
(25.6) -
(24.2) -
(24.8) -
(24.4) -
Pre-tax Profit
34.2
30.0
27.2
42.2
55.6
Income tax
(5.6)
(9.4)
(12.2)
(15.2)
(16.7)
0.2
1.4
1.8
0.8
0.8
28.8
22.0
16.8
27.9
39.7
Revenue Cost of Sales Gross Profit
Net interest Exceptional Items Profits from Associated Co.
Minority Interests Net Profit Source: Company, NRA Capital estimates
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Etika International Holdings Ltd Balance Sheet YE 30 September (RMm) 2011A
2012A
2013F
2014F
2015F
31.3
45.2
47.5
38.3
35.5
Trade Receivables
156.1
156.6
158.6
148.9
160.0
Inventory
147.0
132.1
132.6
125.7
134.2
5.0
9.3
11.1
11.1
11.1
Current Assets
339.4
343.1
349.9
324.0
340.9
Property, Plant and Equipment
259.7
308.6
335.3
358.6
365.8
Others
147.1
157.0
158.5
158.1
158.1
Non-current Assets
406.8
465.6
493.8
516.7
523.9
Bank Borrowings
135.4
192.1
168.1
171.4
176.6
34.0
10.6
6.4
6.4
6.4
101.8
116.0
112.2
105.1
112.2
4.5
6.9
11.4
11.9
12.1
Current Liabilities
276.1
325.5
298.1
294.8
307.3
Bank Borrowings
220.9
224.7
240.4
222.4
211.3
26.6
27.6
27.9
27.9
27.9
Non-current Liabilities
247.4
252.3
268.3
250.3
239.2
Shareholder's Equity
222.7
230.9
277.3
295.6
318.3
Cash & Fixed Deposit
Other current assets
Bank OD Trade Payable Others
Others
Source: Company, NRA Capital estimates
page 4
Etika International Holdings Ltd Cash Flow YE 30 September (RMm) 2011A
2012A
2013F
2014F
2015F
Pre-tax profits
34.2
30.0
27.2
42.2
55.6
Adjustments
40.3
64.4
58.6
60.2
59.9
Operating cash flow before working capital
74.4
94.3
85.8
102.4
115.5
Changes in working capital
(33.6)
20.1
(4.1)
5.0
(17.2)
Tax paid & others
(20.9)
(16.1)
(18.2)
(15.2)
(16.7)
19.9
98.4
63.5
92.2
81.6
(103.4)
-
-
-
-
(40.6)
(72.0)
(51.8)
(49.4)
(34.3)
0.0
(0.4)
2.6
(0.0)
(0.0)
(144.5)
(83.8)
(49.2)
(49.4)
(34.3)
136.2
61.2
(12.5)
(15.2)
(6.5)
-
-
40.9
-
-
Dividends paid
(22.5)
(15.7)
(8.4)
(8.8)
(16.2)
Others
(17.9)
(23.1)
(28.2)
(27.3)
(26.9)
95.8
22.5
(8.3)
(51.2)
(49.6)
(28.8)
37.1
6.0
(8.4)
(2.3)
25.3
(3.1)
34.2
41.2
31.9
0.4
0.2
1.0
(0.8)
(0.4)
(3.1)
34.2
41.2
31.9
29.2
Cash flow from Operating activities
Net cash generated from operations Cash flow from investing activities Acquisition of subsi., net of cash Property, plant & equipment Others Net cash from investing activities Cash flow from financing activities Loans Net proceeds from issue of new shares
Net cash from financing activities
Net change in cash Cash balance at beginning of year Other adjustments Cash balance at end of year (net of OD & adjms) Source: Company, NRA Capital estimates
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Etika International Holdings Ltd
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 SGXST. 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.
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