People's Food PFood - On a rebound

In line. FY08 net profit of Rmb703m (+43% yoy) was in line with our estimate of Rmb705m but 8.9% ahead of consensus. Turnover grew 22% yoy, underpinned by strong fresh pork and LTMP sales which contributed to slightly-higher-than- expected gross margins of 9.6%. However, disappointing results from its associate tempered the better performance. The group declared a final DPS of Rmb0.105.

Solid improvement. We are encouraged by the improvement in sales of fresh pork and LTMPs, up 55% and 106% yoy respectively. This helped to lift blended gross margins to 9.6% from just 7.9% in FY07 when the group reeled under a shortage of live hogs. Operating costs, however, were slightly higher than expected as the group stepped up efforts to promote its Jinluo brand. But EBITDA margins still improved to 9.3% from 7.8% in FY07.

Limited upside for hog prices. Hog prices have once again retreated in recent weeks as demand fell after Chinese New Year. We believe there is room for prices to fall further to the Rmb11-12/kg level as hog supply gradually builds up. Barring unforeseen circumstances including swine disease and natural disasters, we see no reason why hog prices would revert to previous highs.

Maintain Outperform. Given that the earnings recovery is on track, we are keeping our forecasts intact. We also introduce FY11 numbers. We continue to value the stock using sum-of-the-parts valuation, applying 4x CY10 P/E to its upstream business and 6x to its downstream operations, in line with valuations for the other F&B stocks under our coverage. Our unchanged target price of S$0.85 implies 5.2x CY10 P/E. Maintain Outperform.

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