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NEUTRAL
(maintain)
Analysts
Lim Siyi (Lead) +65 6531 9824
Andy Wong +65 6531 9817
Relative total return 1m 3m 12m
Sector (%) 2 1 3
STI-adjusted (%) -1 -2 -13
Price performance chart
726
790
855
919
984
1048
Dec-11 Mar -12 Jun-12 Sep-12
2300
2540
2780
3020
3260
3500
FST CS FSST I
Sector Index Level Mar ket Index Level
`
Sources: Bloomberg, OIR estimates
Stock coverage ratings
BBRG Ticker PriceFair
ValueRating
SSG SP Equity 0.52 0.55 BUY
VIZ SP Equity 0.71 0.74 BUY
PETRA SP Equity 2.87 3.12 BUY
BREAD SP Equity 0.65 0.49 SELL
Bright start; quiet fizzle
The FTSE ST Consumer Services Index (FSTCS Index) started 2012 on
a bright note before succumbing to global economic concerns (along
with the Straits Times Index) in Apr. Although there was a subsequent
rally fueled in part by a spate of M&A activity on consumer-related
counters it failed to gather sufficient momentum and the FSTCS
Index could potentially finish in negative territory for the second
consecutive year.
Exposure to EM Asia consumer demand a winning strategy
While the broad sector index produced sputtering results, an
investment strategy focused on riding the wave of emerging Asia
consumer demand fared extremely well in 2012. Consumer-related
counters with exposure to emerging markets such as Indonesia, the
Philippines and Myanmar experienced sustained appreciation in their
stock price throughout the year. With a tepid economic outlook fordeveloped markets in 2013, EM Asia presents the best avenue for
consumer-related growth and we advocate a similar strategy of
selecting counters with such exposure in the coming year.
Favour regional exposure over domestic
Given the dynamics of Singapores economy, it remains vulnerable to
lingering global economic concerns. In addition, its resident population
lacks the size and ability to become a supportive factor for growth.
Therefore, we continue to favour the growing domestic consumption
of its regional peers. Our preferences within the region are Indonesia,
the Philippines, Thailand and Myanmar. The extension of cheap credit
and government spending on infrastructure projects and social
initiatives has produced results in these countries, and 2013 will
feature more of the same. In addition, armed with the comparatively
healthier balance sheets, these EM nations have the flexibility to
adopt more accommodative monetary policies, if needed, to support
such initiatives.
Recommendation: EM Asia consumer + defensive
Historically, the FSTCS Index has mostly trailed the Straits Times
Index in performance. Entering 2013, we expect that this trend will
continue and, as such, we maintain our NEUTRALoutlook on the
consumer sector. For EM Asia consumer exposure, our top picks are
Petra Foods[BUY; FV: S$3.12] and Viz Branz[BUY; FV:
S$0.74]. We also advocate a defensive allocation into Sheng Siong
Group[BUY; FV: S$0.55] for its resilience against economic
downturns and attractive dividend yield.
FAVOUR EM ALLOCATION Broad sector does not outperform
But exposure to EM Asia consumption
pays off
Maintain allocation; add defensive
CONSUMER SECTOR | NEUTRAL10 Dec 2012
Sector Update
Asia Pacific Equity ResearchSingapore | ConsumerSector
MICA(P)041/06/2012Please refer to important disclosures at the back of this document.
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Table of Contents
Section A: 2012 in review 3
Section B: 2013 Outlook 8
Regional Viewsi. ASEAN-5 11ii. Myanmar 18iii. China 20
Section C: Recommendation & Sector Picks 22
Section D: Company Reports
i. Sheng Siong Group 24ii. Viz Branz 26iii. Petra Foods 28iv. BreadTalk Group 30
Section E: Disclaimer 32
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Section A: 2012 in review
Bright start; quiet fizzle2012 got off to a bright start for the FTSE ST Consumer Services Index(FSTCS Index) but the rallys momentum began fizzling out in May.Although a spate of M&A activity later in the year revitalised the sector,the consumer services index failed to return to its earlier heights and hassince retraced downwards. If investor sentiment deteriorates further onUS fiscal cliff concerns, the FSTCS Index could end the year in negative
territory for the second consecutive year (YTD: FSTCS Index +1.5%versus +17.4% for the Straits Times Index).
Exhibit 1: 2012 Index performance (Rebased = 100)
95
100
105
110
115
120
Dec-11
Jan-
12
Feb-
12
Mar
-12
Apr-1
2
May
-12
Jun-
12
Jul-1
2
Aug-
12
Sep-
12
Oct-
12
Nov-
12
FSTCS STI
Source: Bloomberg, OIR
Despite the sputtering performance of the consumer services index,companies exposed to consumer demand in emerging Asia marketsproved to be the outperformers within the sector. Encouraged by the
increasing promotion of domestic consumption within these markets andthe political progress in countries such as Myanmar, investors rushed toobtain exposure to these markets through counters such as SuperGroup[Non-rated], Food Empire[Non-rated] and Petra Foods
[BUY; FV: S$3.12].
Exhibit 2: 2012 selected performance (Rebased = 100)
0
100
200
300
FSTCS SUPER VIZ FEH
PETRA SSG THBEV
Source: Bloomberg, OIR
Rising costs in focus
At the company level, revenue growth for consumer-related firms wastepid, which is hardly surprising, given the uncertain macro-environment.
These companies also faced additional challenges from rising operatingexpenses particularly labour costs which increased pressures onoperating margins.
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The impact of recent government policies to reduce Singaporesdependence on foreign labour (by charging higher foreign-worker leviesand restricting employment numbers) was compounded by risinginflation (CPI +3.4% in 2012) and a tight labour market (unemploymentrate 1.9%1), resulting in a manpower shortage and higher wage costs. Asurvey by DP Information Group found that more than seven in ten smalland medium enterprises (SMEs) reported rising manpower costs as themain reason affecting their profitability2.
although cost management was effectiveDespite rising operating costs, consumer-related companies stillmanaged a respectable performance. Through a mix of cost-controlmeasures managing inventory more effectively, purchasing rawmaterials in bulk, and altering pay structures to make them morevariable the companies were able to reduce cost pressures, and insome cases even improve margins.
Retail sales soft but improving
Overall retail sales volume excluding the heavily weighted motorvehicle component rose 1.4% MoM in Sep (+3.9% YoY) to add to theprevious months marginal gains of 0.6% MoM (+2.8% YoY). Similarly,the value of retail sales (ex. Motor vehicles) for Sep rose 0.7% MoM
(+3.3% YoY), compared to a gain of 0.3% MoM in Aug (+2.3% YoY).Sales volume for telecommunication apparatus and computers providedthe strongest support with a 19.3% MoM gain while other segments suchas department store and supermarket sales volumes remained resilientwith MoM gains of 0.4% and 1.1%, respectively.
*Motor vehicles were excluded from our analysis due to the distortion
effect of the COE auction process on automobile sales, and invariably,
overall retail sales.
Exhibit 3a: Retail sales value (% change MoM) & selected categories
-20.0
-10.0
0.0
10.0
20.0
Jan
12/D
ec11
Feb
12/J
an12
Mar
12/F
eb12
Apr
12/M
ar12
May
12/
Apr1
2
Ju
n12
/May
12
Jul
12/
Jun
12
A
ug12/
Jul1
2
Se
p12
/Aug
12
-5.0
0.0
5.0
Department stores Supermarkets Motor vehicles
Watches & jew ellery Telecommunications apparatus & computers Medical goods & toiletries
Total w/o MV (RHS)
Sources: Department of Statistics Singapore, OIR
1Seasonally adjusted overall unemployment rate, Sep 2012, Ministry of Manpower2SMEs Embrace Productivity to Counter Rising Costs, DP Information Group, 26 Nov 2012,
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Exhibit 3b: Retail sales volume (% change MoM) & selected categories
-20.0
-10.0
0.0
10.0
20.0
30.0
Jan 12/ Dec 11 Feb 12/ Jan 12 Mar 12/ Feb 12 Apr 12/ Mar 12 May 12/ Apr 12 Jun 12/ May 12 Jul 12/ Jun 12 Aug 12/ Jul 12 Sep 12/ Aug 12
-5.0
0.0
5.0
Department stores Supermarkets Motor vehicles
Watches & jew ellery Telecommunications apparatus & computers Medical goods & toiletries
Total w/o MV (RHS)
Sources: Department of Statistics Singapore, OIR
Trend perking upThe decent Sep retail sales figures have somewhat halted the downwardtrend exhibited in both the MoM and YoY figures. Although retail sales for3QCY2012 still remain soft given the small improvement in MoM figures,the pace of MoM declines for segments that are more sensitive toeconomic conditions have slowed since May (which, coincidentally, wasthe worst performing month for the year). While retail sales for big-ticketitems such as watches and jewellery remain affected by the uncertaineconomic outlook, retail sales in other segments such as departmentstore spending, wearing apparel and footwear are recovering slowly andcould receive a boost in the seasonally stronger 4QCY2012.
But challenges to F&B services remain
Despite deriving some positives from the 3QCY2012 retail sales figures,the outlook for the Food & Beverage (F&B) services sector is less obvious.Sales volume and value both fell MoM in Sep 2012, by 0.8% and 1.1%,respectively, reversing marginal improvements recorded in Aug. Inparticular, the restaurant segment remains weak after a third straightmonth of declines in both sales volume and value while fast food outletsand other eating places continue to exhibit mixed signals. Thisdisconnect between the outlook for overall retail sales and F&B servicesseem to come from a trade-off in discretionary consumer spending, i.e.purchasing versus eating out. In our view, as the economic environmentis still uncertain, consumers may not have the luxury of doing bothactivities, and have to allocate their resources accordingly whilstmaintaining some semblance of prudence.
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Exhibit 4a: F&B services value (% change MoM)
-10.0
-5.0
0.0
5.0
10.0
Jan 12/ Dec 11 Feb 12/ Jan 12 Mar 12/ Feb 12 Apr 12/ Mar 12 May 12/ Apr 12 Jun 12/ May 12 Jul 12/ Jun 12 Aug 12/ Jul 12 Sep 12/ Aug 12
-5.0
0.0
5.0
10.0
Re staurants Fas t food outle ts Food catere rs Other eating places Total (RHS)
Sources: Department of Statistics Singapore, OIR
Exhibit 4b: F&B services volume (% change MoM)
-10.0
-5.0
0.0
5.0
10.0
15.0
Jan 12/ Dec 11 Feb 12/ Jan 12 Mar 12/ Feb 12 Apr 12/ Mar 12 May 12/ Apr 12 Jun 12/ May 12 Jul 12/ Jun 12 Aug 12/ Jul 12 Sep 12/ Aug 12
-5.0
0.0
5.0
10.0
Res taurants Fas t food outlets Food cater ers Othe r eating places Total (RHS)
Sources: Department of Statistics Singapore, OIR
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Our sector coverage performanceWithin the sector, our coverage includes Sheng Siong Group[BUY; FV:S$0.55], Viz Branz[BUY; FV: S$0.74], BreadTalk Group[SELL; FV:S$0.49] and Petra Foods[BUY; FV: S$3.12].
Exhibit 5: YTD performance of coverage (Rebased = 100)
50
100
150
200
250
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12 Oct-1
2
BREAD VIZ PETRA SSG
Source: Bloomberg, OIR
Sheng Siong stable
Given its defensive qualities a strong balance sheet and a naturalresilience to economic downturns as well as its commitment to pay out90% of its net profit as dividends, Sheng Siong Group proved to be themost stable in terms of equity performance. Its 9MFY12 operationalresults met our expectations and those of the street, so it was notsurprising to see resilient interest from investors throughout the year.
Viz Branz speculation beneficiaryOur top performer was Viz Branz, which was the subject of takeover
speculation for almost the entire year. A partial share sale to Lam Soonadded fuel to the fire and the counter hit all-time highs. On a YTD basis,the counter doubled in value, compared to the overall sectors flattishperformance.
Petra Foods EM Asia darlingAs mentioned earlier, investors rewarded counters with strong exposureto emerging Asia consumer demand. Petra was a deserved recipient ofthis interest, with its sizeable market share in Indonesia and thePhilippines.
BreadTalk slow to igniteStill in the midst of its expansion phase, the counter continued to
experience margin pressures. Without support from its profitablerestaurant segment, BreadTalk would have recorded some declines in itsoverall business. Despite our cautious stance and downgrade of thecounter, it managed to play catch-up at the end of the year to show amodest YTD appreciation.
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Section B: 2013 outlook
Singapore outlook
Insipid growth a repeat of 2012Similar to 2012s forecast, the Ministry of Trade and Industry (MTI) hasplaced Singapores 2013 growth in the 1-3% range (FY2012 growthexpected at 1.5%), citing persisting weaknesses in the global economy.Meanwhile, the International Monetary Fund (IMF) has cut its growth
outlook for most economies further in its most recent World EconomicOutlook. It now forecasts that advanced economies such as the UnitedStates and developed Eurozone countries (e.g. Germany, France) willexpand by just 1.5% in 2013, compared to its earlier projection of 1.8%growth3. The IMF also lowered its overall growth estimate for 2013 foremerging-market and developing economies to 5.6%, from 5.8%previously.
Exhibit 6: Selected IMF 2013 Projections
Year over Year (%)
ProjectionsDifference fromJul 2012 WEO
2010 2011 2012 2013 2012 2013
World Output 5.1 3.8 3.3 3.6 0.2 0.3
Advanced Economies 3 1.6 1.3 1.5 0.1 0.3
United States 2.4 1.8 2.2 2.1 0.1 0.1
Euro Area 2 1.4 0.4 0.2 0.1 0.5
EM Economies 7.4 6.2 5.3 5.6 0.3 0.2
China 10.4 9.2 7.8 8.2 0.2 0.2
India 10.1 6.8 4.9 6 1.3 0.6
ASEAN-5 7 4.5 5.4 5.8 0 0.3
Source: IMF World Economic Outlook Oct 2012
ASEAN-5 includes Indonesia, the Philippines, Thailand, Vietnam and Malaysia
Given that the macro-economic uncertainty has not dissipated and that
the global economy is expected to maintain its sluggish pace of recovery,there seems to be little cheer in store for the coming year.
Tourism loses its appealIn its outlook, the MTI has highlighted transport engineering and theconstruction sector as potential support pillars for the economy in 2013.Surprisingly, tourism which was included in the previous years outlook has been omitted from mention. Although international arrivals and
tourism receipts have grown YoY (according to the latest available1H2012 figures from the Singapore Tourism Board), we suspect concernsover a possible slowdown in the coming months could have weighed onthe overall projections. For instance, 2Q2012 saw a 5.2% QoQ decline inoverall tourism receipts to S$5.5b, partly due to a 19.7% QoQ (-7% YoY)
decline in sightseeing and entertainment (including gaming) receipts toS$1.19b. In fact, other than expenditure on items such as airfares,transportation, medical and education, all the main tourism components(i.e. shopping, accommodation, and F&B) also saw QoQ declines inexpenditure.
3IMF, World Economic Outlook October 2012, Page 2
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Exhibit 7: QoQ declines in SG tourism expenditure
0
500
1,000
1,500
S h o p p i n g A c c o mmo d a t i o n F o o d & B e v e r ag e S i g h t s e e i n g &
E n t e r t a i n m e n t
( i n c l u d i n g G a m i n g )
O t h e r T R
C o m p o n e n t s
(S$m)
2Q12 1Q12
Source: STBOther TR components include expenditure on airfares, port taxes, local transportation, business,medical, education and transit visitors.
We believe that this decline in tourism expenditure can be attributed inpart to the decreasing appeal of Singapores two Integrated Resorts(IRs), which have seen revenue taper off since the initial euphoria whenthey opened, as the global situation remains lethargic. For instance,Genting Singapore saw 3Q12 revenue fall 34% YoY, with the majority of
the slide due to a reduction in gaming revenue. Therefore, we reverseour previous view that the IRs would prove to be supportive andacknowledge that further, significant drop-offs are possible if theeconomic downturn worsens and becomes detrimental to travelsentiment.
But employment remains tightThe employment situation in Singapore remains tight with
unemployment currently at 1.9% (as at Sep 2012). This is a continuedimprovement from the recent high of 3% in 2009. The tight labourmarket has pushed up wages in Singapore (even after factoring ininflation).
Exhibit 8a: Qtrly avg wages since 1995 Exhibit 8b: % Change in total wages
2,000
3,000
4,000
5,000
1Q95
3Q97
1Q00
3Q02
1Q05
3Q07
1Q10
3Q12
S$
-2
0
2
4
6
8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Department of Statistics Singapore Source: Ministry of Manpower
Historically, average monthly earnings tend to spike in the first and lastquarters of the year due to the pay-out of year-end/annual bonuses and taper off slightly in the middle two quarters. Fortunately, even withthe lukewarm macro-economic environment, there has not been a wage
decline similar to that seen during the 2001/02 dot-com bust or the 2009financial crisis. We are optimistic that the stability in wages will translateinto greater domestic consumption.
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Alterations to cost structureAs mentioned earlier, restrictions on foreign labour and rising wagepressures have increased the burden of operating expenses oncompanies. This downward pressure should persist into 2013, and withrevenue growth likely to be challenging, consumer-related companies willhave to reinforce cost-cutting initiatives and continue to tighten spendingto help sustain bottom-line growth.
Slowly improving retail sales
As mentioned earlier, we see retail sales in Singapore slowly improvingdespite still-soft figures. We remain optimistic that with highemployment and wage stability retail spending will continue to pick upand ultimately spur growth within the services producing industries inSingapore. We maintain our previous assertion that retail sales will notdeteriorate to the low of 2009, and we are projecting mid to high single-digit YoY increases in spending for 2013.
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Regional views
i. ASEAN 5
Exhibit 9a: IMF 2013 Projections
Year over Year (%)
Projections
2010 2011 2012 2013
ASEAN-5 7 4.5 5.4 5.8
China 10.4 9.2 7.8 8.2
India 10.1 6.8 4.9 6
Indonesia 6.2 6.5 6 6.3
Philippines 7.6 3.9 4.8 4.8
Malaysia 7.2 5.1 4.4 4.7
Vietnam 6.8 5.9 5.1 5.9
Thailand 7.8 0.1 5.6 6
Myanmar 5.3 5.5 6.5 6.3
Singapore 14.8 4.9 2.1 2.9
Source: IMF World Economic Outlook Oct 2012
The lessons learnt from the Asian Financial Crisis back in the late 1990shave taught Asian economies the importance of maintaining balanced
budgets and shoring up their balance sheets. This fiscal prudence hasresulted in a healthy position where the respective Central Banks canexercise accommodative monetary policies in an effort to stimulate theeconomy at times of stress.
Given the weakness and slowdown in exports, we see more EMeconomies extending cheap credit or spending directly on infrastructure
projects and social initiatives such as building schools to provide jobs andto improve their citizens well-being. By encouraging domestic activity,the respective governments enrich their citizens via new jobs andincreases in discretionary income.
Exhibit 9b: Asian equity index performance (Rebased = 100)
80
100
120
140
Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12
PCOMP JCI STI KLCISET SHCOMP VN
Source: Bloomberg, OIR
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Indonesia stellar growth to continueWith a burgeoning middle class and growing GDP per capita, Indonesiastands out as a giant within the ASEAN 5. The country has emergedpretty much unscathed from the macro-economic uncertainty, and ourprevious forecast of sustained consumption growth in 2012 has beenproven correct.
The IMF has projected that Indonesias economy will expand by over 6%this year (faster than other Asean countries such as Malaysia andThailand at ~5% each)4, aided by infrastructure spending and increases
in minimum wages. With domestic demand resilient, the economy isprojected to grow a further 6.3% in 2013. The base beneficiaries of thissustained level of spending will be consumer staples-related companies,followed by those in the discretionary spending category. Some of these
beneficiaries include automobiles, where sales have touched recordlevels, and modern retail such as personal care, telecommunications andelectronics.
Exhibit 11: % of average income per capita on non-food expenditure
30
40
50
60
1999 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(%)
Source: Badan Pusat Statistik (Central Bureau of Statistics Indonesia)
4IMF, World Economic Outlook October 2012, Page 72
Exhibit 10: Growth in minimum wage (IDR 000s)
400
600
800
1,000
1,200
2004 2005 2006 2007 2008 2009 2010 2011 2012Source: CEIC, OIR
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In addition, Indonesias insulation from global woes has also led to anincrease of foreign direct investment (FDI) into the country, which willfurther support the growth outlook for 2013 and beyond. For instance, in1H2012, FDI into Indonesia grew 30.3% on an annual basis to US$11.9b.We expect the government to continue its efforts to attract more FDI.Indonesia also has the worlds largest work force, and with its improvinginfrastructure, the countrys outlook is bright.
Exhibit 12: Quarterly foreign investments (US$m)
0
2,000
4,000
6,000
8,000
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
Source: CEIC, OIR
Philippines darling of South-East AsiaNo longer the sick man of Asia, the Philippines equity market has beenone of the top performing markets globally in 2012 (Philippines StockExchange PSEi Index +32.5% YTD). Its attractiveness has stemmedfrom an increase in government spending on infrastructure projects andsocial initiatives, as well as strong domestic demand. Coupled with animproving export situation (exports rose by more than 22% YoY in Sep
2012) and the elevation of its credit rating by Standard & Poors (to onelevel below investment grade), the Philippines has been able to attractmore FDI to supplement its growth.
Exhibit 13: Approved foreign direct investment (PHP'000s)
0
50,000
100,000
150,000
1Q96
2Q97
3Q98
4Q99
1Q01
2Q02
3Q03
4Q04
1Q06
2Q07
3Q08
4Q09
1Q11
2Q12
Source: CEIC, OIR
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Exhibit 14: Non-agricultural minimum daily wage (PHP)
250
300
350
400
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
0
150
300
450
600
Real (LHS) Nominal (RHS)
Source: CEIC, OIR
Confident of its ability to sustain growth factors moving into 2013, thegovernment recently set high growth targets for both 2013 and 2014 (6-7% for 2013 and 6.5-7.5% for 2014). It has set a record infrastructurebudget of more than US$9b in 2013 to be spent on major upgrades ofairports and access roads in order to maintain and attract a high level of
foreign investment. Strong remittances are also expected to continue,which will support domestic consumer spending.
Exhibit 15: Total income & expenditure (all income classes)
0
2,000
4,000
1991 1994 1997 2000 2003 2006 2009
(PHPb)
70.0%
80.0%
90.0%
Overall total Income (LHS)Overall total expenditure (LHS)% expenditure (RHS)
Source: CEIC, OIR
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Thailand environment remains conduciveThe success of the recovery and rebuilding process following thedevastating floods has accelerated Thailands growth in 2012. Its equitybarometer, the SET50 Index, is also one of the top performing equityindices in the world so far (+30.2% YTD).
Exhibit 16a: Average monthly wages Exhibit 16b: Value of total investments approved
6,000
8,000
10,000
12,000
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
(THB)
0
150,000
300,000
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
(THBm)
Source: CEIC, OIR Source: CEIC, OIR
Entering 2013, the outlook remains positive for Thailand. Its low interestrate environment should remain conducive for growth while businessconfidence in Thailand has also improved significantly in the past fewmonths. In addition, growing income prospects from increasing farmoutput (related to government subsidies) and higher wages (surveyshave projected higher salary increases in 2013 of ~6% versus 5.7% in2012) should translate into greater domestic consumption.
Exhibit 17: Overall business sentiment index
30
40
50
60
Jan-
08
May-
08
Sep-
08
Jan-
09
May-
09
Sep-
09
Jan-
10
May-
10
Sep-
10
Jan-
11
May-
11
Sep-
11
Jan-
12
May-
12
Sep-
12
Source: CEIC, OIR
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Malaysia lingering election concernsGrowth in Malaysia is expected to moderate to 4.4% in 2012 (from 5.1%in 2011) following anaemic global growth5. However, much of thesupport came from domestic-led growth, which helped to offset the drop-off from external-related sectors. In addition, increasing governmentinfrastructure spending and various growth initiatives (e.g. IskandarMalaysia in Johor) that are part of the Economic TransformationProgramme provided further investment impetus.
Exhibit 18: Average monthly household expenditure
0 500 1,000 1,500 2,000 2,500
1994
1999
2005
2010
(MYR)
Source: CEIC, OIR
Nonetheless, there are some jitters over the impending elections thathave to be called by April 2013. The pre-election posturing amongst thetwo main political alliances is likely to remain a distraction for now,although most market participants have priced in an outcome of noregime change.
Exhibit 19a: Unemployment rate (%) Exhibit 19b: Mean household income
2.50
3.00
3.50
4.00
4.50
Jan-09 Nov-09 Sep-10 Jul-11 May-12
0
1
2
3
4
5
1997 1999 2002 2004 2007 2009
(MYR'000s)
Source: CEIC, OIR Source: CEIC, OIR
Once the election cycle has ended and in all likelihood the BarisanNasional is returned to power we can expect private investment tocontinue and wage growth to persist on the back of greater job creation.
5IMF, World Economic Outlook October 2012, Page 72
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Vietnam challenges aheadThe IMF-projected growth rate in 2012 of 5.1% is close to our estimatesat end-2011 of less than 6% growth4. However, compared to its regionalpeers, Vietnam continues to face a tougher set of issues. AlthoughVietnam has been successful so far in lowering its fiscal deficit, improvingits balance of payments and broadly stabilising its exchange rate throughits monetary policy, there remain key downsides high inflation, lowreserves and vulnerability to capital outflows. While demand for itsexports has been resilient, government policies remain the main risk for
its growth. Furthermore, if the government lowers interest rates tooquickly, it could unsettle the foreign exchange market.
Challenges notwithstanding, business confidence has still improvedsignificantly over the past six months. On the domestic front, retail salesand consumer spending are still on the uptrend while businesses arefactoring in double-digit salary growth in 2013. If this increase in wagesdoes materialise, we can expect to see a corresponding rise in consumerspending.
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ii. Myanmar
Gradual lifting of economic sanctionsSince embarking on major political and economic reformation in 2011,Myanmar has been embraced by the global community. The adoption ofoutward-looking policies has seen foreign participation in the economyincrease via private investments and assistance from supranationalagencies. The government has also proposed a five-year developmentplan to achieve a 7.7% annual GDP growth, a GDP per capita increase of
1.7x by 2015, and a shift away from agriculture towards the industrialsector as the main contributor to GDP. With the progress, economicsanctions put in place previously have started to unwind gradually.
Well-positioned between India and ChinaBordering both India and China, Myanmar will benefit greatly fromjostling between the two giants. The competition to include Myanmarwithin their respective spheres of influence will result in the offering offavourable investment packages and industrial expertise to develop itsvarious sectors and infrastructure. This increased importance on the geo-
political front will allow Myanmar to receive the support it needs as itaddresses sorely needed infrastructure requirements.
Exhibit 20a: Foreign Direct Investment (US$m) Exhibit 20b: Myanmar's borders
0
2,000
4,000
6,000
8,000
10,000
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
(US$m)
Source: CEIC, OIR Source: Google Maps
Untapped consumer marketOn a more pragmatic note, there is still a lot to be done before Myanmarcan achieve the growth targets it has set. In addition, the transition fromagriculture towards the industrial sector may take a while, given the
availability of other low-cost regions such as Bangladesh.
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Exhibit 21: Average monthly household expenditure
0
20,000
40,000
60,000
80,000
100,000
1989 1997 2001 2005 2006
(Kyat)
56%
60%
64%
68%
72%
76%
Hous ehold Expe nditure F&B Expe nditur e
% F&B/Expenditure (RHS)
Source: CEIC, OIR
Nonetheless, with a population of more than 60m, Myanmar offers animmense, untapped consumer market. Companies that already have anestablished presence in Myanmar have experienced encouraging growthand this trend will likely persist. Although official data is scarce,preliminary sources indicate a high proportion of F&B expenditure in
average monthly household spending. In addition, if Myanmar is able tosort out the repatriation of funds into the country in the near term,remittances from its sizeable overseas work force could help to fueldomestic consumption much like the Philippines.
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iii. China
Higher growth in 2013
Given that Europe is Chinas largest trading partner, 2012 has been arelatively difficult period for China, although its economy started to turnhigher from the middle of the year. The initial growth forecasts of >8%have proved to be over-optimistic, due mainly to weakness in exportdemand, but 2012 growth is now expected to come in at around 7.8%,
supported by public investment in infrastructure projects.
Exhibit 22: China GDP growth
6
9
12
15
2005 2006 2007 2008 2009 2010 2011 2012E 2013E
(%)
Source: Bloomberg, IMF
While China has recently seen a leadership change, no significantchanges to its economic policies are expected. Goals set up in the 12thfive-year plan should continue unabated, and the transitioning towards adomestic consumption-driven growth model will remain the key aim.
That said, we expect China to maintain its prudent monetary policy(liquidity management with relatively unchanged interest rateenvironment) in concert with a supportive fiscal policy (via sustainedinfrastructure investment and wage gains). The IMF projects Chinas
2013 growth to come in at 8.2%6.
Exhibit 23: YoY % growth in retail sales
5
10
15
20
25
Jan-06 Oct-
06Jul-0
7Apr-
08Jan-
09 Oct-09
Jul-10
Apr-11
Jan-12 Oct-
12
(%)
Source: CEIC, OIR
6IMF, World Economic Outlook October 2012, Page 72
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Overcapacity issues balance out inflationary pressuresAlthough Chinas PMI expanded for the first time in 13 months apromising sign, especially given seasonal weaknesses much of theimprovement came on the back of increasing household spending.Industries such as steel and machinery are still plagued by overcapacityissues and excess inventory levels. While it will take some time beforethe overcapacity issues moderate, inflationary pressures should ease inthe meantime.
Exhibit 24: Monthly % change CPI
-4
0
4
8
12
Jan-06 Oct-
06Jul-0
7Apr-
08Jan-
09 Oct-09
Jul-10Apr-
11Jan-
12 Oct-12
(%C
hg)
Source: CEIC, OIR
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Section C: Recommendation & Sector Picks
Exhibit 25: Historical STI & FSTCS Index performance (Rebased = 100)
40
90
140
Aug-9
9
Aug-0
0
Aug-0
1
Aug-0
2
Aug-0
3
Aug-0
4
Aug-0
5
Aug-0
6
Aug-0
7
Aug-0
8
Aug-0
9
Aug-1
0
Aug-1
1
Aug-1
2
FSTCS STI
Source: Bloomberg
Maintain NEUTRALHistorically, the FSTCS Index has mostly trailed the Straits Times Indexin performance. The consumer sector is also often overlooked in favourof the oil & gas or property sectors, which tend to consist of larger, more
stable corporations. Entering 2013, we expect that this trend willcontinue and, as such, we maintain our NEUTRALoutlook on theconsumer sector.
Favour regional exposure over domesticGiven the dynamics of Singapores economy, it remains vulnerable tolingering global economic concerns. In addition, its resident populationlacks the size and ability to become a supportive factor for growth.Therefore, we continue to favour the growing domestic consumption of
its regional peers. Our preferences within the region are Indonesia, thePhilippines, Thailand and Myanmar. The extension of cheap credit andgovernment spending on infrastructure projects and social initiatives hasproduced results in these countries, and 2013 will feature more of the
same. In addition, armed with the comparatively healthier balancesheets, these EM nations have the flexibility to adopt moreaccommodative monetary policies, if needed, to support such initiatives.
Therefore, for consumer counters with a diversified geographical revenuestream, we like Viz Branz [BUY; FV: S$0.74] and Petra Foods [BUY; FV:S$3.12]. We like Viz Branz for its exposure to high growth markets such
as China and Myanmar, and Petra Foods for its dominant market shareand position in Indonesia and the Philippines.
Within the domestic space, we favour Sheng Siong Group [BUY; FV:S$0.55] for its defensive qualities against economic downturns andunhindered top-line growth prospects. Armed with an attractive dividendpolicy, SSG provides investors with a stable return proposition as well.
Our least favoured pick remains BreadTalk Group [SELL; FV: S$0.49].As it is still in its expansion stage, the group continues to experiencemargin pressures and will not be able to reward investors with attractivedividends. While the counter will in time achieve its expansion targetof having China account for 50% of its top line, we believe that there are
more appealing investment choices available at the moment.
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Coverage highlights
Sheng Siong Group: Strong growth ahead
We upgrade Sheng Siong Groups (SSG) FY13/14 revenue growth to10% (previously 5% and 3%, respectively) on the back of full-yearcontributions from the eight new stores opened in FY12. The absence offurther price competition amongst the Big 3 supermarket chains andlingering doubts over the macro-environment will also provide support
for this defensive counter. In addition, we anticipate a continuation ofthe 90% net profit dividend payout policy, which will further enhance itsattractiveness in FY13 and beyond. Maintain BUY at an unchanged fairvalue estimate of S$0.55.
Viz Branz: Another step forward
Viz Branzs (VB) former CEO has unreservedly withdrawn all his previousallegations of impropriety about a series of payments involving thecompany. We view this development as a positive event that coincides
with the possibility of a general offer (GO) by Lam Soon Cannery. Takentogether, the resolution of an outstanding family dispute and theabsence of a dividend declaration for FY12 suggest that preparations arebeing made for an impending offer. While the counter has fluctuated in
recent trading, we urge investors to keep the faith and reiterate ourstance that a GO will materialise. In addition, the investment case for VBremains sound with its strong fundamentals and FY13 growth projections.We maintain BUYwith an unchanged fair value estimate of S$0.74.
Petra Foods: Pickup in 2013
Since our initiation report on Petra Foods, the counter has appreciated by7.5% to continue on its amazing ascension in 2012 (YTD: +55%). Ourvaluation of Petra pegged at 24x 12-month forward PE is at a
premium to its global peers but the desire of investors to gain exposureto emerging Asia consumer demand clearly vindicates it. For 2013, weproject a modest top-line growth of 3.8%, mainly on the back of theBranded Consumer division, while we also anticipate marginimprovements from the 7.6% in FY11 to ~9% by FY13F. We remainsanguine over Petras growth prospects in the coming year, and in lightof Petras recent appreciation, we raise our multiple to 25x 12-monthforward PE (approaching one standard deviation above its six-yearaverage forward PE. This increases our fair value to S$3.12 from S$2.98previously. Maintain BUY.
BreadTalk Group: Take profit now
Despite experiencing a sharp fall in May this year, BreadTalk Groups(BTG) share price managed to recover gradually, and is now poised toend the year with a modest gain (YTD: +20.5%). While BTGs revenuegrew alongside store expansion, the performance came at the expense ofoperating margins. With this trend likely to persist into FY13 and theabsence of an offsetting, attractive dividend we see no catalyst for thegroup and urge investors to take profit at current levels. Reinforcing ourovervalued assertion, BTG is also currently trading at close to onestandard deviation above its six-year average forward rolling PE of 11.4x.We reiterate our SELLcall for BTG at an unchanged fair value estimate
of S$0.49.
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Double-digit growth to continue
We upgrade Sheng Siong Groups (SSG) FY13/14 revenue growth to
10% (previously 5% and 3% respectively). Full-year contributions
from the eight new stores opened in FY12 representing an increaseof 14% in gross retail space justify this adjustment. Furthermore,
SSGs strategy of opening stores in under-represented areas (i.e.
those with a growing or sizeable resident population) has allowed the
group to benefit from the build-up in pent-up consumer demand. This
is demonstrated by the success of its Geylang and Bukit Batok stores,
which broke-even only after a month of operations.
Macro-environment remains conducive
Being a counter with defensive qualities, lingering macro uncertainty
will continue to prove supportive for the segment as consumers
exercise prudence in dining habits.
Threat of price competition diminished
With rising operating expenses (due mainly to wage pressures), we
deem the re-occurrence of price competition amongst the Big 3
supermarket chains to be remote. It is not in the interest of the Big 3
to cut into their margins further by waging an unnecessary price war.
Instead, it is likely that a tacit agreement to maintain status quo
exists amongst the Big 3.
90% dividend payout policy likely to remain
FY12 will the last year SSG commits to paying out 90% of its PAT as
dividends. However, in our opinion and earnings projections, SSG
should have no difficulties if it chooses to persist on its 90% PAT
dividend payout commitment. Its cash balances have remained above
S$100m since 3Q11 despite a significant increase in its store network,
increasing inventory requirements, and no borrowings, which clearly
signify that store expansion is unhindered.
Maintain BUY
While SSG will experience a seasonally weaker 4Q12, it is still on
track to finish the year out strongly. As we roll our projections
forward, we maintain our BUYrating at an unchanged fair value
estimate of $0.55.
STRONG GROWTH AHEAD More stores to come
Price competition won't return
Maintain BUY
10 Dec 2012Company Update
SHENG SIONG GRP |BUY
Asia Pacific Equity ResearchSingapore | Food & Staples Retailing
BUY (maintain)Fair value S$0.55
add: 12m dividend forecast S$0.03
versus: Current price S$0.52
12m total return forecast 11%
Analysts
Lim Siyi (Lead) +65 6531 9824
Andy Wong +65 6531 9817
Key information
Market cap. (m) S$719 /
USD589
Avg daily turnover (m) S$1 /
USD1
Avg daily vol. (m) 14.1
52-wk range (S$) 0.375 - 0.53
Free float (%) 28.4
Shares o/s. (m) 1,383.5
Exchange SGX
BBRG ticker SSG SP
Reuters ticker SHEN.SI
ISIN code OV8
GICS Sector Consumer Staples
GICS IndustryFood & Staples
Retailing
Top shareholderSS Holdings -
32.4%
Relative total return 1m 3m 12m
Company (%) 7 9 na
STI-adjusted (%) 5 6 na
Price performance chart
0.40
0.44
0.48
0.52
0.56
0.60
Jun-12 Sep-12 Dec-12
2700
3000
3300
3600
3900
4200
Fair Value SSG SP FSSTI
Shar e Pr ice (S$) Index Level
`
Sources: Bloomberg, OIR estimates
Industry-relative metrics
0th 25th 50th 75th 100th
PB
PE
ROE
Beta
Mkt Cap
Company Indust r y Aver age
Percent i le
Note: Industry universe defined as companies under identical GICS classificationlisted in the same exchange.Sources: Bloomberg, OIR estimates
Key financial highlights
Year ended 31 Dec (S$m) FY10 FY11 FY12F FY13F
Revenue 628.4 578.4 635.0 698.5
Cost of sales -491.7 -450.6 -496.0 -543.5
Gross profit margin (%) 21.8 22.1 21.9 22.2
Net profit 42.6 27.3 42.6 37.1
EPS (SG cents) 3.2 2.0 3.1 2.7
Cons. EPS (S cts) na na 2.4 2.7
Adj. Net profit margin (%) 5.3 4.7 6.7 5.3
NTA per share (SG cents) 4.8 10.7 11.0 11.3
ROE (%) 48.0 25.7 28.3 24.0
Dividend yield (%) 0.0 3.4 5.3 4.6
Please refer to important disclosures at the back of this document. MICA (P) 035/06/2012
MARKET CAP: USD 589M AVG DAILY TURNOVER: USD 1M
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Company financial highlights
Company financial highlights
Income statement
Year ended 31 Dec (S$m) FY10 FY11 FY12F FY13F
Revenue 628.4 578.4 635.0 698.5
Cost of sales -491.7 -450.6 -496.0 -543.5
Distribution costs -4.4 -4.1 -4.1 -4.9
Administrative expenses -98.3 -91.6 -98.2 -110.4
Net other operating income 14.6 2.1 13.9 4.2
Operating profit 48.7 34.3 50.6 44.0
Net finance income 0.0 -0.1 0.7 0.7
Profit before tax 48.7 34.2 51.4 44.7
Income tax expense -6.1 -7.0 -8.8 -7.6
Net profit 42.6 27.3 42.6 37.1
Balance sheet
As at 31 Dec (S$m) FY10 FY11 FY12F FY13F
Bank and cash balances 85.9 122.1 133.8 142.9
Property, plant, and equipment 58.3 72.1 76.6 77.0
Other assets 31.1 47.0 32.5 35.8
Total assets 175.3 241.2 242.9 255.6
Debt 22.3 0.0 0.0 0.0
Current liabilities ex. debt 88.6 91.8 89.7 98.6
Non-current liabilities ex. debt 0.6 1.1 0.6 0.7
Total liabilities 111.5 92.9 90.3 99.3
Shareholders equity 63.9 148.3 152.6 156.3
Total equity and liabilities 175.3 241.2 242.9 255.6
Cash flow statementYear ended 31 Dec (S$m) FY10 FY11 FY12F FY13F
Op profit before working cap. chg. 43.2 40.4 56.6 50.1
Working cap, taxes and int -9.2 -12.3 -6.7 -2.4
Net cash from operations 34.0 28.1 49.9 47.7
Purchase of PP&E -38.4 -23.6 -6.5 -6.5
Other investing flows 31.1 -19.9 0.0 0.0
Investing cash flow -7.3 -43.5 -6.5 -6.5
Financing cash flow 20.1 51.6 -32.4 -32.8
Net cash flow 46.8 36.2 11.0 8.4
Cash at beginning of year 39.1 85.9 122.1 133.0
Cash at end of year 85.9 122.1 133.8 142.9
Key rates & ratios FY10 FY11 FY12F FY13F
EPS (SG cents) 3.2 2.0 3.1 2.7
NTA per share (SG cents) 4.8 10.7 11.0 11.3
Gross profit margin (%) 21.8 22.1 21.9 22.2
Adj. Operating profit margin (%) 6.3 5.9 8.0 6.3
Adj. Net profit margin (%) 5.3 4.7 6.7 5.3
PER (x) 16.4 26.4 16.9 19.4
Price/NTA (x) 10.9 4.9 4.7 4.6
Dividend yield (%) 0.0 3.4 5.3 4.6
ROE (%) 48.0 25.7 28.3 24.0
Debt/equity (x) net cash net cash net cash net cash
Sources: Company, OIR forecasts
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Non-issue for VB
In a surprise development, Viz Branz (VB) announced that its
appointed auditors, Ernst & Young (EY), will not express an audit
opinion for its recently concluded FY12 financial statements. The basisfor this disclaimer of opinion stems from earlier allegations of
impropriety over a series of payments involving the company made by
VBs former CEO and current top shareholder, Mr. Chng Khoon Peng,
which have since been unreservedly withdrawn. After reviewing the
auditors note and speaking with management, we deem this
development to be a non-issue for VB.
Lack of access to CAD investigations, if any, cited as cause
EY cites the lack of access to the earlier complaints lodged with the
Commercial Affairs Department (CAD) as one of the reasons for this
disclaimer. In addition, EY stated they were unable to perform audit
procedures to ascertain the nature of transactions alleged to have
been irregular, and if the transactions were properly recorded and
presented.
But CAD investigations did not even commence
From our understanding and confirmed with management
investigations into the allegations were not even initiated by the CAD
nor was there any indication that it was in the process. Furthermore,
the allegations were about irregular payments to the CEO and not
fraudulent revenue/profit recognition procedures.
Audit reaction a bit of an overkill
Since its establishment in 1988, this is the first instance where a
disclaimer has been issued. Management stands by their FY12
financial statements and stressed that the figures present a true and
fair view of the company as at end-FY12. VB operations will continue
unhindered in the meantime.
Focus still on GO; maintain BUY
While this development may cause some short-term weakness in VBs
share price, we stand by our assertion that an impending GO is likely.
A possible dip in the counter should open up buying opportunities for
investors. We maintain our BUYrating with an unchanged fair value
of S$0.74.
DISCLAIMER NOT A CONCERN Perplexing development
Allegations withdrawn; no CAD
investigations
VB may see sell-offs; buy on dips
10 Dec 2012Company Update
VIZ BRANZ LIMITED |BUY
Asia Pacific Equity ResearchSingapore | Consumer Staples
BUY (maintain)Fair value S$0.74
add: 12m dividend forecast S$0.03
versus: Current price S$0.71
12m total return forecast 10%
Analysts
Lim Siyi (Lead) +65 6531 9824
Andy Wong +65 6531 9817
Key information
Market cap. (m) S$250 /
USD205
Avg daily turnover (m) S$0.5 /
USD0.4
Avg daily vol. (m) 3.8
52-wk range (S$) 0.315 - 0.75
Free float (%) 14.7
Shares o/s. (m) 354.9
Exchange SGX
BBRG ticker VIZ SP
Reuters ticker VIZB.SI
ISIN code L5J
GICS Sector Consumer StaplesGICS Industry Food Products
Top shareholderChng Khoon Peng -
38.3%
Relative total return 1m 3m 12m
Company (%) 6 1 128
STI-adjusted (%) 4 -2 112
Price performance chart
0.30
0.42
0.53
0.65
0.77
0.89
Jan-12 Apr -12 Jul -12 Oct-12
2500
3520
4540
5560
6580
7600
Fair Value VIZ SP FSSTI
Shar e Pr ice (S$) Index Level
`
Sources: Bloomberg, OIR estimates
Industry-relative metrics
0th 25th 50th 75th 100th
PB
PE
ROE
Beta
Mkt Cap
Company Indust r y Aver age
Percent i le
Note: Industry universe defined as companies under identical GICS classification listed in
the same exchange.Sources: Bloomberg, OIR estimates
Key financial highlights
Year Ended 30 Jun (S$m) FY11 FY12 FY13F FY14F
Revenue 165.7 172.7 186.1 201.3
Gross Profit 52.5 59.0 61.4 66.4
Net Profit 12.2 17.9 18.5 19.8
Net Earnings Growth (% YoY) -27.8 83.9 -1.5 7.0
EPS (SG cents) 3.3 4.8 4.9 5.3
Cons. EPS (S cts) na na 4.9 5.3
PER (x) 21.5 14.8 14.3 13.3
NAV per share (SG cents) 26.4 26.7 28.3 31.1
ROE (%) 13.2 18.8 18.4 17.9
Dividend Yield (%) 3.5 4.7 3.5 3.5
Please refer to important disclosures at the back of this document. MICA (P) 035/06/2012
MARKET CAP: USD 205M AVG DAILY TURNOVER: USD 0.4M
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Company financial highlights
Company financial highlights
Income statement
Year Ended 30 Jun (S$m) FY11 FY12 FY13F FY14F
Revenue 165.7 172.7 186.1 201.3
Cost of Sales -113.2 -113.8 -124.7 -134.9
Gross Profit 52.5 59.0 61.4 66.4
Operating expenses -34.8 -34.1 -35.2 -38.3
EBITDA 21.5 28.3 29.9 32.0
Depreciation & Amortisation -3.3 -3.1 -3.1 -3.2
EBIT 18.2 25.2 26.8 28.8
Net Interest & Other Costs -0.4 0.0 -0.4 -0.5
Income Tax Expense -5.6 -7.3 -7.9 -8.5
Net Profit 12.2 17.9 18.5 19.8
Balance sheet
As at 30 Jun (S$m) FY11 FY12 FY13F FY14F
Cash 33.7 39.8 46.5 52.6
Inventories & Other Assets 36.9 50.6 40.6 43.9
Accounts Receivables 28.3 22.4 37.2 40.3
Fixed & Intangible Assets 45.6 42.9 41.8 40.6
Total Assets 144.6 155.6 166.1 177.4
Debt 23.9 33.1 31.4 29.9
Accounts Payable 26.5 26.0 31.3 33.3
Total Liabilities 50.4 59.1 62.8 63.2
Shareholders Equity 94.2 96.5 103.3 114.2
Total Liabilities and Equity 144.6 155.6 166.1 177.4
Cash flow statementYear Ended 30 Jun (S$m) FY11 FY12 FY13F FY14F
Operating Profit 19.2 29.4 29.7 31.8
Working Capital Changes 6.2 1.5 -14.6 -3.6
Net Interest & Taxes -6.3 -5.2 -8.1 -8.8
Net Cash from Operations 19.1 25.8 7.0 19.4
Purchase of PPE -1.8 -1.9 -2.0 -2.0
Investing Cash Flow -1.7 -0.6 -2.0 -2.0
Financing Cash Flow -10.3 -19.2 1.7 -11.2
Net Cash Flow 7.1 6.1 6.7 6.1
Cash at beginning of year 26.6 33.7 39.8 46.5
Cash at end of year 33.7 39.8 46.5 52.6
Key rates & ratios FY11 FY12 FY13F FY14F
Net Earnings Growth (% YoY) -27.8 83.9 -1.5 7.0
EPS (SG cents) 3.3 4.8 4.9 5.3
PER (x) 21.5 14.8 14.3 13.3
NAV per share (SG cents) 26.4 26.7 28.3 31.1
Price/NAV (x) 2.7 2.6 2.5 2.3
EV/EBITDA (x) 9.3 6.6 6.5 5.9
Dividend Yield (%) 3.5 4.7 3.5 3.5
ROIC (%) 10.5 14.0 14.0 14.1
ROE (%) 13.2 18.8 18.4 17.9
ROA (%) 8.4 11.5 11.1 11.2
Sources: Company, OIR forecasts
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Continued ascension justifies premium
Since our initiation report on Petra Foods, the counter has appreciated
by 7.5% to continue on its amazing ascension in 2012 (YTD: +55%).
Our valuation of Petra previously pegged at 24x 12-month forwardPE is at a premium to its global peers but the desire of investors to
gain exposure to emerging Asia consumer demand clearly vindicates
it.
Top-line pickup in FY13
For 2013, we project a modest top-line growth of 3.8%, mainly on the
back of the Branded Consumer division. Consumption growth in its
key markets of Indonesia and the Philippines should fuel the Branded
Consumer division, and we expect revenue growth to come in at 10%.
While this figure is partially offset by weaknesses in the Cocoa
Ingredients division and we have factored in a conservative 1.8%
revenue decline we agree with managements assessment that the
headwinds could dissipate by end-FY13.
Margin improvementsSince the lows of 2008, Petras EBITDA margin has remained fair
stable. This stability can be attributed to the groups dual-engine
growth model, which allows one division to pick up the slack of the
other in times of operational difficulties. For instance, the recent woes
surrounding the Cocoa Ingredients division led to the lowest
segmental EBITDA margin in more than three years. However, the
stellar performance of the Branded Consumer division via a
combination of higher-margin product mix, ASP increases and
favourable raw material costs helped to offset the decline. We
anticipate an easing of the yield pressure in the Cocoa Ingredients
division in the comng months, and we expect margins to improve
from the 7.6% in FY11 to ~9% by FY13F. That said, we predict
bottom-line growth in FY13F of 5.8%.
Increase multiple to 25xWe remain sanguine over Petras growth prospects in the coming
year, and in light of Petras recent appreciation, we raise our multiple
to 25x 12-month forward PE (approaching one standard deviation
above its six-year average forward PE). This increases our fair value
to S$3.12 from S$2.98 previously. Maintain BUY.
PICKUP IN 2013 Premium justified
Revenue growth with margin
improvement in FY13
Fair value raised
10 Dec 2012Company Report
PETRA FOODS |BUY
Asia Pacific Equity ResearchSingapore | Consumer Staples
BUY (maintain)Fair value S$3.12
add: 12m dividend forecast S$0.02
versus: Current price S$2.87
12m total return forecast 9%
Analysts
Lim Siyi (Lead) +65 6531 9824
Andy Wong +65 6531 9817
Key information
Market cap. (m) S$1,754 /
USD1,436
Avg daily turnover (m) S$1 /
USD1
Avg daily vol. (m) 0.9
52-wk range (S$) 1.7 - 2.87
Free float (%) 39.2
Shares o/s. (m) 611.2
Exchange SGX
BBRG ticker PETRA SP
Reuters ticker PEFO.SI
ISIN code P34
GICS Sector Consumer Staples
GICS IndustryPackaged Foods &
Meats
Top shareholderBerlian Enterprises -
50.5%
Relative total return 1m 3m 12m
Company (%) 9 20 70
STI-adjusted (%) 6 16 54
Price performance chart
1.62
2.02
2.41
2.81
3.20
3.60
Dec-11 Mar -12 Jun-12 Sep-12
2300
2920
3540
4160
4780
5400
Fair Value PETRA SP FSSTI
Shar e Pr i ce (S$) Index Level
`
Sources: Bloomberg, OIR estimates
Industry-relative metrics
0th 25th 50th 75th 100th
PB
PE
ROE
Beta
Mkt Cap
Company Indust r y Aver age
Percent i le
Note: Industry universe defined as companies under identical GICS classification listed inthe developed Asia exchanges.Sources: Bloomberg, OIR estimates
Key financial highlights
Year ended 31 Dec (US$m) FY10 FY11 FY12F FY13F
Revenue 1,566.0 1,702.2 1,493.4 1,550.1
EBITDA 108.4 129.6 131.4 139.7
Depreciation & amortization 23.7 24.3 26.9 29.7
PATMI 44.5 60.6 59.0 62.4
EPS (SG cents) 9.4 12.1 11.8 12.5
Cons. EPS (S cts) na na 9.2 10
EBITDA margin (%) 6.9 7.6 8.8 9.0
Net profit margin (%) 2.8 3.6 4.0 4.0
Dividend yield (%) 1.1 1.5 1.6 1.5
ROA (%) 4.6 5.8 5.2 5.2
Please refer to important disclosures at the back of this document. MICA (P) 038/06/2012
MARKET CAP: USD 1.44B AVG DAILY TURNOVER: USD 1M
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Singapore Equities
Company financial highlights
Company financial highlights
Income statement
Year ended 31 Dec (US$m) FY10 FY11 FY12F FY13F
Revenue 1,566.0 1,702.2 1,493.4 1,550.1
EBITDA 108.4 129.6 131.4 139.7
Depreciation & amortization 23.7 24.3 26.9 29.7
EBIT 84.8 105.3 104.5 110.1
Net interest -25.9 -27.4 -26.9 -27.9
Associates and exceptional items 0.3 0.4 0.0 0.0
Profit before tax 58.5 78.7 77.7 82.2
Income tax expense -14.0 -18.2 -18.6 -19.7
Minority interests 0.0 -0.1 0.0 0.0
PATMI 44.5 60.6 59.0 62.4
Balance sheet
As at 31 Dec (US$m) FY10 FY11 FY12F FY13F
Bank and cash balances 42.8 19.1 110.8 75.0
Property, plant, and equipment 255.6 280.4 307.3 297.1
Inventories 491.4 477.9 537.6 558.1
Other assets 264.1 269.9 262.9 272.0
Total assets 1,053.8 1,047.2 1,218.6 1,202.1
Debt 549.1 521.1 642.1 587.0
Lliabilities excluding debt 210.6 229.2 209.3 210.5
Total liabilities 759.7 750.3 851.5 797.5
Shareholders equity 294.1 296.9 367.1 404.6
Total equity and liabilities 1,053.8 1,047.2 1,218.6 1,202.1
Cash flow statementYear ended 31 Dec (US$m) FY10 FY11 FY12F FY13F
Op profit before working cap. chg. 112.1 125.1 131.4 139.7
Working cap, taxes and int -169.3 -23.3 -87.1 -47.2
Net cash from operations -57.2 101.7 44.4 92.5
Purchase of PP&E -13.5 -52.4 -55.0 -20.0
Other investing flows -12.8 1.0 0.0 0.0
Investing cash flow -26.3 -51.3 -55.0 -20.0
Financing cash flow 101.4 -40.9 70.1 -108.4
Net cash flow & adjustments 24.4 -23.7 91.8 -35.9
Cash at beginning of year 18.3 42.8 19.1 110.8
Cash at end of year 42.8 19.1 110.8 75.0
Key rates & ratios FY10 FY11 FY12F FY13F
EPS (SG cents) 9.4 12.1 11.8 12.5
NTA per share (SG cents) 54.2 50.3 64.5 72.0
EBITDA margin (%) 6.9 7.6 8.8 9.0
Net profit margin (%) 2.8 3.6 4.0 4.0
PER (x) 28.3 22.1 22.7 21.4
Price/NTA (x) 6.0 6.5 5.1 4.5
ROA (%) 4.6 5.8 5.2 5.2
ROE (%) 17.7 20.5 17.8 16.2
Dividend yield (%) 1.1 1.5 1.6 1.5
Net gearing (%) 175.9 173.7 149.2 131.2
Sources: Company, OIR forecasts
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Time to reap the gains
Despite experiencing a sharp fall in May this year, BreadTalk Groups
(BTG) share price managed to recover gradually, and is now poised to
end the year with a modest gain (YTD: +20.5%). While BTGs
revenue grew alongside store expansion, the performance came at
the expense of operating margins. With this trend likely to persist into
FY13, we see no catalyst for the group and urge investors to take
profit at current levels.
Margin pressure to continue
BTGs main goal is to achieve an overseas revenue contribution of
more than 50%, and by our projection, this target will not materialise
in the near term. That said, its operating and net profit margins have
continued to suffer declines for the past two years, and look set to
make it three in a row for FY12. In addition, even the traditional
stability of its gross profit margin has been eroded as cost-saving
initiatives reach their limits.
No attractive dividends
To fuel this expansion, dividend payments will remain a non-priority
for the group. Given the reinvestment requirements, we project an
unattractive dividend payout of ~25% of PATMI for FY13 onwards,
similar to the average of 26% from FY06 to FY10. Although FY11 saw
a higher payout of ~36% (and potentially FY12 could, too), in our
view, it was more to reward long-suffering investors than the start of
a sustainable payout trend.
Overvalued; maintain SELL
BTG is also currently trading at close to one standard deviation aboveits six-year average forward rolling PE of 11.4x. Given the absence of
catalysts in the near term and weakening demand for its bakery and
food court operations, BTGs valuation is expensive in our view. We
reiterate our SELLcall for BTG at an unchanged fair value estimate of
S$0.49.
TAKE PROFIT NOW Margin pressure to continue
No attractive dividends to offset
Overvalued; lock in gains
10 Dec 2012Company Update
BREADTALK GROUP |SELL
Asia Pacific Equity ResearchSingapore | Food & Staples Retailing
SELL (maintain)Fair value S$0.49
add: 12m dividend forecast S$0.01
versus: Current price S$0.65
12m total return forecast -22%
Analysts
Lim Siyi (Lead) +65 6531 9824
Andy Wong +65 6531 9817
Key information
Market cap. (m) S$181 /
USD148
Avg daily turnover (m) S$0.1 /
USD0.1
Avg daily vol. (m) 1.7
52-wk range (S$) 0.46 - 0.645
Free float (%) 41.7
Shares o/s. (m) 280.6
Exchange SGX
BBRG ticker Bread SP
Reuters ticker Bread.SI
ISIN code 5DA
GICS Sector Consumer Staples
GICS IndustryFood & Staples
Retailing
Top shareholder Quek TM - 34.1%
Relative total return 1m 3m 12m
Company (%) 8 17 24
STI-adjusted (%) 5 14 9
Price performance chart
0.43
0.48
0.54
0.59
0.64
0.70
Dec-11 Mar -12 Jun-12 Sep-12
2100
2380
2660
2940
3220
3500
Fair Value Bread SP FSSTI
Shar e Pr i ce (S$) Index Level
`
Sources: Bloomberg, OIR estimates
Industry-relative metrics
0th 25th 50th 75th 100th
PB
PE
ROE
Beta
Mkt Cap
Company Indust r y Aver age
Percent i le
Note: Industry universe defined as companies under identical GICS classification
listed in the same exchange.Sources: Bloomberg, OIR estimates
Key financial highlights
Year ended 31 Dec (S$m) FY10 FY11 FY12F FY13F
Revenue 302.9 365.9 447.2 516.8
Gross Profit 165.2 200.1 239.2 273.9
Net operating expenses -148.7 -183.1 -221.4 -256.3
PATMI 11.3 11.6 11.4 11.4
EPS (SG cents) 4.0 4.1 4.1 4.0
Cons. EPS (S cts) na na 4.3 4.4
EBITDA Growth (% YoY) 16.4 -1.7 -2.6 -5.0
Net Profit Growth (% YoY) -4.1 5.3 2.7 -5.8
ROE (%) 17.4 15.8 14.0 12.8
Dividend Yield (%) 1.6 2.3 2.3 1.6
Please refer to important disclosures at the back of this document. MICA (P)038/06/2012
MARKET CAP: USD 148M AVG DAILY TURNOVER: USD 0.1M
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Singapore Equities
Company financial highlights
Company financial highlights
Income statement
Year ended 31 Dec (S$m) FY10 FY11 FY12F FY13F
Revenue 302.9 365.9 447.2 516.8
Gross Profit 165.2 200.1 239.2 273.9
Net operating expenses -148.7 -183.1 -221.4 -256.3
EBIT 16.6 17.0 17.9 17.6
Net Interest 0.0 0.0 -0.4 0.0
Associates & JVs 0.2 0.1 0.4 0.5
Pre-tax Proft 16.7 17.1 17.9 18.1
Income Tax Expense -5.5 -5.4 -5.8 -6.7
Minority Interest -0.1 0.2 0.7 0.0
PATMI 11.3 11.6 11.4 11.4
Balance sheet
As at 31 Dec (S$m) FY10 FY11 FY12F FY13F
Cash 71.1 87.1 113.8 117.2
Inventories 6.1 7.4 8.9 10.3
Accounts Receivables 26.3 49.5 36.2 41.4
Fixed & Intangible Assets 82.4 98.1 109.7 122.8
Total Assets 204.2 262.3 294.7 317.8
Debt 19.1 39.4 60.4 62.0
Accounts Payable 60.8 74.0 91.7 105.9
Total Liabilities 129.1 176.8 201.4 217.3
Shareholders Equity 75.1 85.5 93.3 100.5
Total Liabilities and Equity 204.2 262.3 294.7 317.8
Cash flow statementYear ended 31 Dec (S$m) FY10 FY11 FY12F FY13F
Operating Profit 37.9 43.3 36.9 35.2
Working Capital Changes 5.9 10.6 21.1 7.7
Net Cash from Operations 39.7 49.0 46.6 36.1
Purchase of PPE -30.8 -37.2 -30.0 -30.0
Purchase of Intangible Asset -0.5 -0.6 -0.2 -0.2
Investing Cash Flow -27.8 -49.9 -35.3 -29.2
Financing Cash Flow 0.8 16.8 15.5 -3.6
Net Cash Flow 12.7 15.9 26.7 3.4
Cash at beginning of year 58.4 71.1 87.1 113.8
Cash at end of year 71.1 87.1 113.8 117.2
Key rates & ratios FY10 FY11 FY12F FY13F
Gross Profit Growth (% YoY) 23.2 21.1 19.6 14.5
Operating Profit Growth (% YoY) 1.9 2.6 5.3 -1.8
EBITDA Growth (% YoY) 16.4 -1.7 -2.6 -5.0
Net Profit Growth (% YoY) -4.1 5.3 2.7 -5.8
EPS (SG cents) 4.0 4.1 4.1 4.0
PER (x) 16.1 15.6 15.9 16.0
Dividend Yield (%) 1.6 2.3 2.3 1.6
ROIC (%) 10.0 7.5 5.4 5.4
ROE (%) 17.4 15.8 14.0 12.8
ROA (%) 5.9 5.0 4.3 3.7
Sources: Company, OIR forecasts
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SHAREHOLDING DECLARATION:
The analyst/analysts who wrote this report holdNILshares in the above security.
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- OCBC Investment Researchs (OIR) technical comments and recommendations are short-term and trading oriented.
- OIRs fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon.- As a guide, OIRs BUY rating indicates a total return in excess of 10% given the current price; a HOLD trading indicates totalreturns within +/-10% range; a SELL rating indicates total returns less than -10%.- For companies with less than S$150m market capitalization, OIRs BUY rating indicates a total return in excess of 30%; a HOLDtrading indicates total returns within a +/-30% range; a SELL rating indicates total returns less than -30%.
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For OCBC Investment Research Pte Ltd