Research Notes
Cherkizovo Group: Russia’s meat leader
| 08.06.10 |
We have initiated coverage of Cherkizovo Group, a Russian meat producer and processor. Due to its large size, publicity, excellent growth prospects and stable finances, Cherkizovo’s stock is viewed as one of the most appealing investment opportunities in the consumer sector.
We highlight the following key upside drivers:
- Expected growth in demand for meat and meat products. Our certainty that demand will grow rests on the fact that the current consumption of meat and meat products in Russia has not yet achieved the lower limit of the consumption level recommended by the World Health Organization (being 15% short of that level). A vivid example of the steady demand for meat in the country has been shown in more than a 3% rise in consumption in crisis-stricken 2009. According to our estimates, meat consumption in Russia will subsequently grow at a CAGR of 2%, to at least 75 kilos per capita per year in 2018.
- Competent business growth organization and strategy. The group has a vertically-integrated and well-diversified business, enabling it to have effective cost control, lower its operating risks, more easily adapt to ongoing economic trends and set priorities in its development strategy. At the current stage, the group stakes on development of the pig- and poultry-breeding segments, where net margins are as high as 27% and 19%, respectively. Completion of the Vertunovskaya poultry farm and expansion of the Bryansk and Penza farms should allow Cherkizovo to increase its chicken production up to 240,000 tons by 2012, a 30% gain over 2009. The prospects of the pig-breeding sector are linked with the acquisition of two pig-breeding farms, with a capacity of 25,000 tons of finished foodstuffs per year, in the Penza and Lipetsk regions. Upon reaching full capacity, these complexes should allow the company to bring its total pork output to 110,000 tons through 2012, up from 54,000 tons in 2009.
- Favorable market trends. Current market conditions are beneficial for Cherkizovo. Low prices for feed grain (over the past two-and-a-half years, prices for food-grade wheat have fallen 40% and those for barley have slumped 54%), ŕ s well as steady prices for finished foods (excluding a seasonal factor) should feed growth in company revenues and push up profit margins in the poultry- and pig-breeding segments.
- State support factor. As a company which is vital for food security in the country, the group enjoys special state privileges, including subsidized interest rates on loans (the average effective interest rate on Cherkizovo debt is just 3.9% annually) and preferential taxation (the company has been granted a tax holiday until 2012). State support measures for the meat-processing industry as a whole also play into the group’s hands. Restrictions on meat imports with the help of quotas reinforce the position of Russian domestic meat producers, first and foremost large-scale producers, including Cherkizovo Group.
Based on our valuation of Cherkizovo Group, using a DCF approach, we assign a BUY rating to Cherkizovo common shares, with a 12-month target price of USD 35.5, which implies a 56% upside to the current stock valuations.
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Sectors: Consumer, FoodCompany: Cherkizovo Group