Cerebos Pacific Ltd - Short-term blip (CIMB)

OUTPERFORM Maintained

S$5.33 Target: S$6.65

Mkt.Cap: S$1,688m/US$1,400m

• Below; maintain Outperform with lower target price of S$6.65 (from S$7.30). 2Q11 net profit of S$16.2m (-19% yoy) forms 14% of our FY11 estimate, with 1H11 net profit at 38% of our forecast. The main culprits were: 1) a product recall in Taiwan, Hong Kong, and Singapore; and 2) increasing raw-material costs. We believe the after-effects could persist in 2H11, though Cerebos’s longer-term growth outlook should be unaffected. We cut our earnings estimates by 2-20% for FY11-12 to reflect lower sales and higher costs, which brings down our SOP target price to S$6.65 (from S$7.30). Nevertheless, maintain Outperform as we still anticipate catalysts from stronger-than-expected sales growth further out.

• Sales rose 10%; operating margins declined 8%. Despite its product recall, sales growth was 14% yoy for health supplements. There was growth in its main markets of Thailand (+29% yoy), Malaysia (+35% yoy) and Singapore (+11% yoy). Food & Coffee turnover was roughly flat (+4% yoy, including translation gains). Operating margins were, however, down due to higher raw-material costs and provisions made for product recalls.

• Product recall in Taiwan, Hong Kong, and Singapore. Brand’s tablets were taken off the shelves due to the presence of plasticizers. Management has given the assurance that stringent quality control is in place and this incident was related to supplies from an indirect manufacturer. We can expect increased A&P spending to repair its brand image and higher provisions. However, the blip should be shortterm, given a long-established brand name in its markets.

• Increasing coffee, sugar & bird’s nest prices weighed on operating profit (-8% yoy). We expect the pressure to persist in 2H11, mitigated by management’s ability to pass on the higher prices to corporate customers Also, the unprofitable Riva product range has been dropped, and Toby’s Estate (coffee outlet) is set to open in Singapore in 2H11.

• Dividend policy sustainable. Its historical dividends of 25cts should be sustainable. Cerebos had been paying up to 90+% of its earnings in the past, and had net cash of S$92m at end-Jun 11.