ConscienceFood Hldgs (DBSVickers)

BUY S$0.24 STI : 3,159.93 (Upgrade from HOLD)
Price Target : 12-Month S$ 0.35 (Prev S$ 0.26)
Reason for Report : Company update
Potential Catalyst: Beverage business

A brighter outlook ahead
• Upgrade to Buy on better revenue and margin expectations in 2H11, TP raised to S$0.35
• Margins to improve in 2H11 on higher global wheat supply
• Beverage business to drive earnings in FY12F

Looking forward to a stronger 2H11. We are upgrading CSF from Hold to BUY on better sales and margin expectations. We were previously concerned about CSF’s ability to improve and sustain margins. Following Russia’s lifting of its ban on wheat exports from 1 July 2011, we believe CSF’s margin pressure will ease in 2H11 on higher global wheat supply. The ban has been in place since August 2010.

Revenue for FY11F raised on better sales volumes. Quarterly sales volumes in 4Q10/1Q11 were higher than average on more orders from existing customers. We raise our FY11F revenue estimates by 20% to Rp861bn based on : (a) higher sales volume coupled with an ASP rise of 8% at the end of 1Q11; and (ii) commencement of cup noodle sales in 2H11.

Beverages to drive 46% earnings growth in FY12F. We believe the beverage business is a potential catalyst for CSF in FY12F. On our estimates, the beverage business is capable of netting margins as high as 17%. Based on the planned manufacturing capacity, the beverage business is likely to contribute close to 30% in revenue and earnings in FY12F.

Upgrade to Buy, TP raised to S$0.35. Factoring in the impact of better sales volumes and margins, we revise our FY11F earnings up by 33%. Accordingly, we raise our TP from S$0.26 to S$0.35 based on 7x FY11F PE. Upgrade to BUY with potential upside of 46%.

Better revenue and margin expectations in 2H11

A better 2H11 ahead. We are upgrading CSF from Hold to BUY on better sales and margin expectations. We were previously concerned about CSF’s ability to improve and sustain margins, but following Russia’s lifting of its ban on wheat exports, we believe CSF’s margin pressure will ease on more global supplies in 2H11. CSF also posted strong sales volumes in 4Q10/1Q11 which we believe will be sustainable for the rest of FY11F. Factoring in the impact of better sales volumes and margins, we revise FY11F earnings up by 33%. Based on 7x FY11F PE, we are raising our target price for CSF from S$0.26 to S$0.35.

Wheat prices to ease on more supply. Russia announced that it would lift its export ban on wheat that was in place since August 2010 from 1 July 2011. A drought in Russia last year prompted the Russian government to impose a complete ban on grain exports to avoid domestic price increases. We believe this should put no further pressure on wheat prices for CSF for the rest of FY11F. Wheat prices have risen by 45% to an average of US$302/mt in YTD2011 (2H10 average: US$269/mt) compared to US$208/mt as at 30 June 2010 as drought and floods limited global supplies. Gross margins in 4Q10/1Q11 declined to 26.2%/25.2%, from 28.3% in 9M10. With the increase in global wheat supply going forward, we believe margins for CSF will improve in 2H11 to above 27%.

Revenue raised on better sales volumes. In FY09/FY10, instant noodle sales volume averaged 130m/180m pieces per quarter. Sales volumes in 4Q10/1Q11 were significantly higher at 220m/250m on more orders from existing customers. Therefore, we are raising our FY11F revenue estimates by 20% to Rp861bn based on: (i) higher sales volume coupled with an ASP rise of 8% at the end of 1Q11; and (b) commencement of cup noodle sales in 2H11.

Margin challenges in FY11F, but expect a strong FY12F. The key challenge for CSF in FY11F is higher wheat prices and margin pressure. For FY12F, the earnings outlook is stronger. We believe the beverage business is a potential catalyst for CSF in FY12F. The planned beverage manufacturing business is expected to commence operations and to start contributing in FY12F. On our estimates, CSF’s beverage business is capable of netting margins as high as 17% and based on the planned manufacturing capacity, the beverage business is likely to contribute close to 30% in revenue and earnings in FY12F. Thus, we are expecting strong revenue and earnings growth of 41% and 46% respectively in FY12F as a result of the contribution from the beverage business. The beverage business will also reduce the impact of higher wheat prices on CSF.

Valuations undemanding

Earnings upgraded. We have raised FY11F revenue by 20% to Rp861bn and earnings by 33% to Rp138bn. This is based on improved gross margin projections for 2H11, higher instant noodle sales volumes of above 200m pieces per quarter, higher average selling prices and contribution of cup noodle sales in 2H11.

Undemanding valuations. CSF currently trades at 4.8x prospective earnings. CSF’s current price is also close to its IPO price of S$0.22. Therefore, based on CSF’s earnings growth outlook and undemanding valuation, we think downside for the stock is low.

Upgrade to Buy, TP raised to S$0.35. We continue to value CSF at 7x FY11F PE. Our TP is raised to S$0.35 as we have increased our earnings estimates. Upgrade CSF to BUY with potential upside of 46%.