ConscienceFood Hldgs - On course for steady growth (CIMB)

BUY S$0.215 STI : 2,733.63

Price Target : 12-Month S$ 0.35

Reason for Report : Company update

Potential Catalyst: Beverage business commencing in FY12F

DBSV vs Consensus: FY12F below on gradual ramp up of new busineses

• Expect margin to improve on moderating raw material prices and higher ASPs

• Beverage business and cup noodle businesses remain key growth catalysts in FY12F

• 2Q11 results (+21% yoy) within consensus expectations, but below ours

• Counter at pedestal 4.9x PE, <0.2x PEG. Maintain Buy. TP unchanged at S$0.35

Expect to see continued improvement in margins. We expect sequential improvement in margins as seen in 2Q on lower raw material prices. Wheat prices are now trading at lowest levels in the last 4 quarters. Prices averaged US$295/mt in 2Q11, down c.7% qoq from 1Q11’s US$317/mt. As ASP increase filters through, we expect gross margins to improve sequentially, which will aid in net profit growth, projected at 32% for FY11F.

Catalysts for earnings growth remain intact. We expect FY11F’s earnings to be supported by instant noodle sales volume growth of 29%. New products will further drive growth in FY12F as its cup noodles production ramps up from 2Q11, and beverage business starts from 2H12. We estimate that these new businesses will contribute c.18% to the Group’s revenue in FY12F.

2Q11 net profit +21% yoy. 2Q11 results were within consensus, but below our aggressive estimates. This came about on lower than expected sales volumes, as we had expected strong 1Q growth of 48% yoy to continue into 2Q. Nonetheless, revenue grew 25% yoy to Rp173b driven by sales volume increase of 13% and higher selling prices while earnings grew 24% to reach Rp27b. Despite an expected drop in gross margins to 27.6% (1Q10: 29%) on higher raw material prices, it was an improvement from 25.2% in 1Q11.

Maintain Buy, TP unchanged at S$0.35. We have adopted a more conservative stance in our earnings estimate, and trimmed our FY11F/12F earnings forecasts by 11%/23% due to (i) a moderated increase in instant noodles volume; (ii) slower ramp up in cup noodles; (iii) adjustment in the start up of its beverage business into 2H12. Our TP is maintained at S$0.35 (7x PE), as we roll our valuations to FY11/12F earnings. CSF currently trades at a pedestal 4.9x FY11F PE with a PEG of <0.2x, compared with peers’ average PE of 16x