Mewah International Inc.

Mewah International Inc (the "Company") is offering 251.679m shares (226m New shares and 25.62m vendor) in a global offering at the lower than expected indicative price of S$1.10 per share, citing "volatile market conditions".  The public tranche offer of 12.584m shares will close on 22 Nov at 12pm. The Company is one of the largest palm oil processors in the world by "capacity", manufacturing and distributing edible oil products under well recognised global brand names. 


The Company has 3 refineries and processing plants in Malaysia and 3 packing plants in Malaysia (2) and Singapore (1). The Company is involved in both bulk segment (wholesale) as well as consumer segment (brand management).


Revenue for 2009 was US$2.86 billion and profit after tax was US$89.6 million. For 6 months ended 30 June 1010, the revenue was US$1.62 billion and profit after tax was US$35.5m. Comparing June 30, 2010 figures with the prior period, gross margin (gross profit/sales) has dropped from 11.9% to 7%. Net margin has also declined from 4.24% to 2.19%. While the quantum of net profit is 'huge', against all the peers i seen in the palm oil sector, this is one of the companies with the lowest net margin i have seen. The adjusted EPS for FY ending 31 Dec 2009 was US$0.06 or around Singapore 7.74 cents. That will translate into a listing PER of 14.2x. However, considering the 2010 will be a "down year" due to margins being squeezed by 100%, it is unlikely that the EPS for 31 Dec 2010 will match that of 2009. Assuming we are aggressive and use a 1Hx2 EPS of US$0.04 or Singapore 5.16 cents, that will translate into a forward PER of 21.3x. Of all the "plantation and agricultural" stocks listed in Singapore, only Wilmar and Indofood command such a PE ratios while Golden Agri, First Resources and Kencana are trading in the teens. Malaysian-listed palm oil plays such as IOI and Genting Plantations are trading in the 19-23x range. The fact that Wilmar just announced a disappointing Q3 results and the heavy corrections in the markets are not helping to boost interest in this counter. 


Valuation wise, I would regard the counter as more than fairly valued and with the declining margins seen, I would avoid this issue at current price as i don't believe the 2nd half performance can match the 1st. Top management wise, it is made up of the "Cheo" family (since they founded this business), so it is up to you to interpret if such structure is good or bad for the company. As in all family business, united they stand and disunited, they fall. :)  


Updated analysis thanks to "IPO Hunter" comments


On page 40, the Company indicated that revenue was US$2.2 billion and net profit after tax of US$52.2m. The gross and net margins are 7.3% and 2.4% respectively. EPS for the 8 months was US$0.03. Assume i still "pro-rate" this results over 12 months, the net profit will be US$78.3m and that represents a EPS of US 5.2 cents or Singapore 6.7 cents. That translate into a forward PER of 16.4x.  That helps to make it "in-line" with the market PE ratios and may even provide a small possible upside to $1.34 (assuming 20x forward PE).


The updated analysis is not going to change my 1 Chilli rating for this Company and i would still 'avoid' this IPO at current price. As usual, i can be wrong.