Background: Mewah International processes and distributes edible oils and fats that are primarily palm-based products. Its manufacturing is done at three refineries in Malaysia, where it has another two packing plants. Its third packing plant is in Singapore. The company sells in both the bulk segment and under its own brand of consumer packs, with distribution in Singapore, Malaysia and 100 countries.
Recent development: Last month, Mewah reported weak 3Q11 numbers with a 69% decline in net profit to just US$6.5m. This was a continuation of difficult business conditions it has experienced since 2Q11 and subsequently led to its share price sliding by 60% since July 2011. Over the past month, however, its share price has stabilised at around the current level.
Key ratios…
Price-to-earnings: 10.2x
Price-to-NTA: 1.1x
Dividend per share / yield: Nil
Net gearing: 47%
Net debt as % of market cap: 44%
NTA per share: US$0.35
Share price S$0.48
Issued shares (m) 1,507.1
Market cap (S$m) 723.4
Free float (%) 15
Recent fundraising activities IPO – $276.9m
Financial YE Dec 31
Major shareholders Cheo family – 83%
YTD change -54.3%
52-week price range S$0.365-1.23
Our view
Hit by pricing pressures. The decline in sales volume over the past two quarters, coupled with a drop in average selling prices, has led to a 16% sequential slide in revenue in 3Q11. Profitability has stayed low as margins were affected by declining CPO prices, which have caused customers to delay purchases and renegotiate for lower prices. We expect average CPO prices to slip by a further 20% next year. Going forward, Mewah may be subjected to further margin compression.
Still growing the business. Mewah currently still has expansion projects ongoing in Malaysia and China with a total capex of nearly US$300m. This includes US$50m for the construction of a dairy plant in Malaysia, which has synergies with its palm oil business. This is part of Mewah’s diversification plan, as well as to leverage on its distribution capabilities, particularly in West Africa, for dairy.
No compelling reasons to own. A year after Mewah’s IPO which was priced at $1.10 per share, the stock is trading at less than half of that in the wake of its recent earnings disappointments. Nevertheless, it does not trade at a particular discount to its SGX-listed peers in the palm oil sector. Its positioning in the midstream portion also subjects its margins to pricing pressure both upstream and downstream. The market currently has no “Buys”, three “Holds” and six “Sells” on the stock, which indicates that sentiment remains negative.
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