GFPT

GFPT Plc

Investment thesis: Despite GFPT’s weak 4Q11-1Q12 earnings outlook and the slower-than-expected post-flooding chicken price recovery, we reiterate our TRADING BUY rating, based on two trading ideas: 1) a GFN bottom-line turnaround in 2Q12 and 2) scope for upside to FY12-13 earnings if the EU were to lift its ban on raw chicken imports from Thailand in June 2012. If it were to do so, we estimate 11-12% bottom-line upside, assuming that GFPT got 20% of the salty raw chicken quota. We have revised up our PEG-based YE12 target price by 10% to factor in higher domestic pricing assumptions following Chinese New Year and the normalization of chicken consumption (which dropped with the flooding) by 2Q12. 
Expect YoY profit dip for 4Q11: We estimate a Bt210m net profit for 4Q11, down by 2% YoY and 43% QoQ. Our new number is more subdued than our previous projection of Bt230m, as earlier we were too optimistic about chicken export prices. The estimated YoY profit dip is attributable to lower export prices and falls in export and domestic sale volumes. The QoQ tumble is due to a gross margin decline from 17% in 3Q11 to 12%—low season for exports and aquaculture feed sales, declines in export prices and sales volumes (dampened by the flooding) and higher corn prices.
GFN expected to break-even in 2Q12: We forecast that GFN will post a net loss of Bt70-90m for 1Q12, as we expect the domestic chicken price to remain low at Bt41/kg and export prices to decline further in the quarter. We assume a mean export price of US$3,800/ tonne for the quarter, down 5% QoQ. However, GFN should break even in 2Q12, assuming a higher domestic chicken price of Bt45/kg and mean export price exceeding $4,500/tonne.
EU might lift its raw chicken ban: The EU’s next review of its ban on raw frozen chicken from Thailand is scheduled for June 2012. If the ban were lifted, Thailand could then resume selling up to its quota limit of 90,000 tonnes/annum of raw salty chicken to Europe. Assuming a US$3,000/ tonne export price and that GFPT were to get 20% of the quota, its FY12-13 sales upside would be 9-11%. Based on a net margin of 7-8%, the firm’s FY12-13 net profit would rise 11-12% from our current model.
Outlook
Expect YoY profit dip for 4Q11: We estimate a Bt210m net profit for 4Q11, down by 2% YoY and 43% QoQ. Our new number is more subdued than our previous projection of Bt230m, as earlier we were too optimistic about chicken export prices. The expected YoY profit dip is attributable to lower export prices and falls in export and domestic sales volumes. The QoQ tumble is due to a gross margin decline from 17% in 3Q11 to 12%—low season for exports and aquaculture feed sales, declines in export prices and sales volumes (dampened by the flooding) and higher corn prices. On the bright side, GFN should post a shallower 4Q11 net loss of Bt85m, against losses of Bt146m in 3Q11 and Bt113m in 4Q10. GFN has been operating at its maximum slaughter capacity of 100,000 birds/day since Dec 2011. Live chicken sales to GFN rose 5% QoQ.
Total GFPT sales for 4Q11 should post a 10% YoY rise, augmented by increased live chicken sales to GFN. However, total chicken sales are likely to have fallen both QoQ and YoY drop, due to declines in both volume (down 5-8% QoQ) and prices (down 10-15% QoQ). In contrast, feed sales should have remained solid—livestock feed sales up 20-25% YoY and aqua feed sales up 5-10% YoY—despite the flooding in 4Q11, thanks to a strong marketing effort. The mean export price dropped to US$4,000/tonne in 4Q11, down by 13% QoQ and 3% YoY. The average domestic chicken price was Bt40/kg during the quarter, up 3% YoY but down 2% QoQ. The price of corn in 4Q11 was Bt9.60/kg, up by 5% YoY and 7% QoQ.