Petra Foods share price gains 10% in its debut in January

Will it keep its momentum for the rest for the year?

According to OCBC Investment Research, carrying on from its very impressive rally in 2012 (+85.4%), Petra Foods has appreciated by more than 10% in just the first week of Jan alone. In its Consumer sector strategy report (“Favour EM Allocation”, 10 Dec 2012), OCBC had highlighted its belief that counters with EM Asia exposure, including Petra, would continue to experience favourable growth prospects entering 2013. 

Here’s more from OCBC:

However, the current pace of Petra’s ascent in such a short period has compelled us to temper investor expectations for a sustained spike in its price.

As a recap, Petra’s share price surged strongly following the sale of its Cocoa Ingredients division to Barry Callebaut in mid-Dec for a consideration of US$950m. The move ties Petra’s future growth prospects entirely to its Branded Consumer division, which has been performing phenomenally well with double-digit YoY revenue growth figures in ten out of the past 13 quarters.

As a result, we projected substantial margin improvement for the company in FY13 and raised our fair value estimate significantly (+14.4% to S$3.57). However, Petra’s share price rose too quickly with investor optimism taking the price increase far beyond the estimated disposal gain of approximately 20 S cents per share (US$106m) to be realized following the sale.

The counter is now trading at close to 26x 12-month forward PE, and the last time Petra traded at higher multiples was before the onset of the financial crisis. Following this share price run-up, we decide to downgrade Petra to HOLD on valuation grounds, especially with Petra due to release its FY12 results in the coming weeks.

Keeping our fair value estimate of S$3.57 intact, we urge caution for investors seeking to add exposureat current prices. In fact, existing shareholders who entered at lower prices (i.e. during our initiation in Nov 2012) should also look to lock in some profits.