We expect domestic grain prices to be under pressure in 2012. According to a USDA report released on 9 Dec the world has been moving from a crop deficit to a crop balance over the course of 2011 with harvests normalising globally. Russia is similarly moving from a grain deficit to a grain balance, which has been pressuring prices. Grain prices rose during the recent harvest season as grain traders and processors restocked their inventories, which resulted in unusually high demand. Given that their stocks have now been refilled, we can expect reduced local demand for grain which will remove a price-supportive factor going forward.
Cherkizovo should be well supported in this environment. Domestic pork and poultry prices are due to receive more political support – the government plans to cut pork import quotas from 500,000 tonnes in 2011 to 430,000 tonnes in 2012. Additionally, poultry import quotas will likely fall 6% to 330,000 tonnes in 2012. Difficulties may arise in 2H12 when the government will have to cut pork import duties for both in-quota and above-quota volumes and allow live pig imports in accordance with WTO entry requirements. On its own, this would effectively reduce government support for the sector. However, we think that additional support for pork producers will be introduced: otherwise, these developments would undercut the government’s eight-year effort to rebuild Russian agriculture. Importantly, the WTO entry terms imply that government support for the sector can be doubled.
Capacity expansion proceeding as planned. During a meeting with analysts on 15 Dec, Cherkizovo’s management confirmed that it plans to launch 110,000 tonnes of poultry capacity in Lipetsk in 2015. Furthermore, the company is continuing to expand its pork business and intends to utilise 90,000 tonnes of capacity by 2014.
Cherkizovo looks well positioned for a downturn. History suggests that meat consumption in Russia does not decline when the economy slows or financial markets collapse. Even if the rouble should weaken, local meat prices are unlikely to suffer as they are linked to dollar-denominated imports.
Valuation discrimination. Cherkizovo is currently priced at 65% and 77% discounts to its global meat peers on 2012E and 2013E P/E, respectively and trades at 39% and 49% discounts to peers on 2012E and 2013E EV/EBITDA ratios, on our estimates. As such, the company is trading as if it offers no earnings growth, which is far from reality, in our view. Our intrinsic value estimate for the company shows that even if we assume that growth stops in 2012 (unlikely in our opinion), the GDRs offer 79% potential upside from the current level. Moreover, if we assume that Cherkizovo starts paying taxes and is deprived of interest payment subsidies, this still implies a 2012E P/E of 5.1x, which corresponds to a 62% discount to its EM peer average.
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