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UOBKH recommends BUY with Target Price of $1.20
Mewah International – A cheaper alternative to CPO plays
What’s New
• A cheaper entry to CPO plays. Mewah International (Mewah) is a
pure downstream player trading at 2010F and 2011F consensus PE of
13.1x and 11.2x respectively, a 35% discount to peers’. As the market
looks for proxies to rising CPO prices, this discount gap could narrow.
Assuming a 25% discount to peers, a 13x 2011F PE will give Mewah a
target price of S$1.20 (or a 16.5% upside). The stock is currently
trading below its IPO price of S$1.10.
Stock Impact
• Market might be under estimating Mewah as one of the efficient
palm oil refiners. After our recent meeting with management, we opine
that management has a strong market sense to focus on its key
strength to drive its growth. Mewah’s strengths are in the African
continent for its consumer pack and bulk segments. Although Mewah is
not an integrated plantation company, as a refiner, it manages its
margins and sales well, as seen in its higher margins during the
commodity cycle downturn in 2008.
• Venturing into higher-margin consumer products. Leveraging on its
distribution and marketing network, Mewah has ventured into more
downstream higher4margin consumer4related products − cocoa butter
substitute (CBS), soap and shortening. These products have low
volumes but higher margins due to their niche requirements and are
mainly exported to more developed countries, such as Europe. As seen
in Mewah’s financials, consumer pack margins easily doubled that of
the bulk segment.
• 2H has seasonally stronger earnings (60% of full-year earnings).
Due to seasonal factors, the 2H is usually stronger than 1H of the year.
Based on historical records, the 1H contributed 35445% of full4year
earnings. For 2H10, contribution could be close to 60% of full4year
earnings (1H10: US$35.5m), driven by:
a) Higher festive demand. Due to the festive seasons, sales volume
in 2H would be better than in 1H, at about 45:55.
b) Higher ASP. Due to the stronger festive demand, average selling
price (ASP) for its consumer pack can easily be 50% higher than in
1H.
Share Price Catalyst
• Expansion into upstream for raw materials and margin expansion.
• Acquiring distribution capability in Africa to expand its reach there.
Key takeaways from meeting with Mewah’s CFO:
• Betting on economies of scale to lower operating cost. Based on
channel check, Mewah is one of the efficient downstream producers and
stands to benefit from a sector consolidation. Operating with among4the4
largest capacity of 800,0004900,000 mt/plant, it can spread the fixed cost
over a larger production volume.
• Second-largest refiner in Malaysia. Mewah is the second4largest refiner
in Malaysia with a market share of 14%, just after Wilmar International
(23% share). Its plants are running at a high utilisation rate of above 90%
vs the industry’s 76% for Jan4Nov 10.
• Niche expansion. Mewah’s expansion plan focuses on its niche in:
a) Bulk business. The next capacity expansion in Sabah, Malaysia, will
be used for exports to China. However, Mewah focuses mainly on the
bulk cooking oils segment (for industry use) rather than the highly
competitive consumer pack business. Currently, 60% of bulk sales
come from Malaysia, and China contributes less than 1%. Bulk
contributed about 74% of total sales and 57% of total EBITDA in 2009.
b) Consumer pack for the African continent. Mewah targets to
penetrate the larger African market. It currently focuses only on West
Africa, Nigeria, Benin and Togo. In these markets, Mewah holds
market shares of 45450%. Consumer pack contributed the remaining
26% of total revenue but 43% of total EBITDA due to a greater
EBIDTA margin of 7.7% vs bulk’s 3.3%.
• Sourcing and margins risks are mitigated. Market concerns for a pure
downstream player would be the risks of securing raw materials and the
hedging against price fluctuations. Given that Malaysia is the second4
largest palm oil producer and palm oil is a widely traded commodity, we
do not foresee a risk for Mewah to secure its raw materials from Malaysia
and Indonesia. As for price fluctuations, Mewah tries to construct natural
hedges by matching sales and purchase commitments to lock in the
processing margins, ie, refining margins will be there unless they are not
efficient or when the Malaysian refining industry suffers negative margins.
But as Mewah is one of the largest processors in Malaysia, this would be
less of a problem for Mewah.
Earnings Revision/Risk
• Mewah achieved 8M10 net profit of US$52m vs 6M10 net profit of
US$35.5m, implying net profit of about US$17m in Jul/Aug 10.
Extrapolating the net profit for Jul/Aug 10, net profit could come in at
about US$85m for the year.
Valuation/Recommendation
• If Mewah is able to achieve US$85m in net profit, it would be trading at
2010F PE of 14.6x.
• Based on consensus estimate, Mewah is trading at 2010F PE of 13.7x
(EPS: 7.9 cents) and 2011F PE of 11.7x (EPS: 9.2cents). This is a 35%
discount to purer upstream plantation peers’ PE.
• As the market looks for cheaper alternative plays to rising CPO prices, the
discount gap could narrow. Assuming a 25% discount to its purer
upstream players, a 2011F PE of 13x will give Mewah a fair price of
S$1.20 (or a 16.5% upside)
You have a nice day
Nomura recommends BUY with Target Price of $1.30
Recently listed Mewah, a strong consumer pack oil franchise with majority market
share in West Africa, offers stable margin exposure on the refining side. Its
business mix is changing toward the high-margin branded business, and greater
access to capital markets post listing should unlock a new wave of asset and capex
investments. It is trading at a significant discount (35-40%) to listed peers like
Wilmar and Ruchi Soya, and we believe valuations will re-rate on sustainable
earnings growth and growing information flow post listing. Initiate with BUY.
Catalysts
Strong 2H10F results, any new capex/asset investments across the value chain,
change in mix towards high value consumer pack business.
Anchor themes
Africa is fast becoming popular for exposure to Agri commodities, and players
having a significant presence should be able to better capture the opportunities.
Exposure to African markets: long-term driver
Some 40% of Mewah’s consumer pack earnings are from Africa; it is
a leader in West Africa (we estimate a market share of 40-50% in W.
Africa consumer pack oil); and it aims to accelerate expansion
(highlighted by the acquisition of one of its large distributors). We see
this as a long-term positive, given that Mewah can leverage its
distribution franchise to capture incremental growth in Africa, and its
strong balance sheet can help vertical integration (processing/
plantations) there, too.
Economies of scale, moving to richer margin profile
We believe Mewah’s scale (second-largest Malaysian refiner) and risk
management help it to realise stable refining margins. Also, we expect
its earnings mix to turn more profitable, with sales in the high-margin,
high-P/E consumer pack segment set to rise from 38% in FY10F to
46% in FY13F, which should boost both earnings and valuations.
Momentum in 2H10F, new capacity to help mid term
Mewah’s 1H10 earnings (-31% y-y) look muted, restrained by a high
base. But, there has been a pick up, and we think momentum through
year-end will be strong, led by festive demand and high refined palm
oil prices. Mid term, volumes will likely improve as new projects come
online. Overall, we forecast an earnings CAGR of 17% over FY10-13F,
driven equally by volume and margin growth.
Initiate with BUY, trading at high discount to peers
We value the consumer and refining businesses at a discount to
Wilmar to reflect different scale and markets. Still, the valuation looks
attractive at 10.2x FY11F P/E vs Wilmar’s 16.4x and Ruchi Soya’s
13.9x. Our target blended P/E for Mewah is 14.2x. On attractive
valuation, the potential for rerating given a strong franchise in Africa,
possible capex/M&A and strong 2H10F earnings, we initiate at BUY.
Make love more, don't make more enemies
Scary these days. All new IPO's except the large caps dive like there's no tomorrow. Who's to say it's low enough ? Look at Xinren, Yamada, Oxley, etc. Like the trailer to the old Jaws movie, "Just when you thought it was safe to go back into the water...."
fragaria ( Date: 30-Nov-2010 16:56) Posted:
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Mewah drop to 0.905, is it worth to buy now?