Synear Food - Overvalued

1Q09 core net profit Rmb48.3m (-48.1% yoy) was in line with our expectations, representing 42% of our estimate and 17% of consensus. Core net profit margin slid to 9.3% from 13.7%, on the back of lower other income (including interest income) and less than proportionate decline in operating expenses. Weak consumer confidence continues to batter sales, with top line falling 23.5% to Rmb518.9m A 15% rise in ASP to Rmb9,600/tonne due to better sales mix helped to cushion 34% decline in sales volume. Gross margin remained firm at 26.6% vs 26.8% in 1Q08 as a result of stabilising costs of key raw materials such as pork, flour and packaging materials. Maintain FY09-11 EPS estimates. In light of increased market risk appetite and signs of costs stabilisation, we lift our target price to S$0.12, based on 6x CY10 P/E (from S$0.10, based on 0.2x P/BV). Maintain Underperform.

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