People Food - Pork price bottoming out might help margin recovery in 2H09

Top-line growth still under pressure. In tandem with the declining hog price, Pfood experienced an ASP decrease for the majority of its product categories in 1Q09. Utilisation rate reached only 35.1% in 1Q09 as the company tried to reduce its high-cost frozen pork inventory, given the sharp drop in hog prices. As hog supply continued to pick up in 2Q09, which caused hog price to fall further, we did not expect Pfood’s utilisation rate to improve drastically in 2Q09. Moreover, the downward pressure on Pfood’s ASPs still exist, especially without the Chinese New Year effect in 2Q09, when compared with 1Q09.

Pork price bottoming out might help margin recovery in 2H09. Affected by the accumulation of frozen pork by the central government and feed price increase, domestic pork price rebounded from the bottom in Jun 09, but remained at a relatively low level. Pfood’s management expects sales and margin improvement in 2H09, backed by hog price recovery.

Expect poor 2Q09 results. Gross margin contraction for upstream products might continue in 2Q09 as hog price continues to decline. Although a lower hog price will lift the gross margin for downstream processed meat products to some extent, given that upstream products contributed more than half of the Group’s gross profit, we expect Pfood’s gross margin to be even lower in 2Q09 than 1Q09. Other than the lacklustre turnover growth and contracted margins, losses from its associates, including Pine Agritech, also dragged down Pfood’s net profit in 2Q09. Thus, we expect Pfood to record another 60-70% yoy earnings decrease in 2Q09.

Maintain SELL on People’s Food. Pfood is on the path of an upstream integration to tap into hog farming. The first stage target is to raise about 40,000 heads by end- 10, which can meet approximately 10% of the Group’s slaughter demand. Considering the fluctuations in the profitability of rearing pigs and the risk of an outbreak of pig illness, we are concerned that the pig farm project might drag down Pfood’s profit. The operating environment for Pfood is still challenging, and it takes some time for the Group to experience a recovery and boost its pricing power. Maintain SELL on Pfood with a fair price of S$0.55, based on 8.5x FY09 PE and a 30% discount to China Yurun’s 12.2x FY09 PE.

Sponsored Links