HOLD S$0.855 STI : 3,088.70
(Downgrade from BUY)
Price Target : 12-Month S$ 0.90 (Prev S$ 1.23)
Reason for Report : 2Q11 result preview
DBSV vs Consensus: Below-consensus expectations on FY11 earnings. Less bullish outlook on long-term margins
• Further analysis of MPOB data points to weaker than-expected 2Q11 sales
• Spot refining margins may not reflect actual 2Q11 margins because buyers are delaying purchases
• Cut CY11F-13F volume and margin assumptions
• TP cut to S$0.90; downgrade to Hold on limited upside
Slower sales. Mewah’s Consumer Pack division key export destinations in Africa and the Middle East are Nigeria, Togo, Benin, Angola, Iraq, UAE, and Saudi Arabia. Upon closer analysis of 2Q11 export volumes to these countries (MPOB data), we found they had dropped 18% from a quarter ago, implying corresponding slower volumes for Mewah.
Destocking pressure. The weaker shipments amid falling prices imply customers in Mewah’s key markets are delaying purchases. This should translate into narrower refining spreads – contrary to our earlier view of rising margins (based on daily spot spreads in Bloomberg). Unless this margin pressure is industry-wide, we believe the most plausible reason is loss of market share. In this case, volume recovery could take longer than we expected.
Earnings cut. Reflecting weaker 2Q11 expectations, we cut CY11F-13F sales volumes by 0.4-1.8% and gross margins by 0.2-0.5%. We also cut our long-term gross margin forecasts to 7.7-8.0% from 8.6-9.5% to account for more CPO suppliers building their own refineries (e.g. Sime Darby). Please note that there would still be a seasonal 2H11 volume uptick and initial contributions from specialty fats and refining capacity expansions in 2H11 and 2H12, respectively.
Downgrade to Hold. CY11F -13F EPS are cut by 6.5-14.5% and target price to S$0.90, implying limited 5% upside. Accordingly, we downgraded our rating on Mewah to Hold in the absence of compelling catalysts.
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