Srithai Superware

Srithai Superware Plc (SITHAI)

Investment thesis: Since our initial BUY call on July 19, SITHAI’s share price has jumped 24.2%, outperforming the broad SET by 23.4%. So what’s next? After talking with management, we upgraded our FY12-13 earnings forecasts to factor in: 1) better-than-expected household product sales in 1H12 and 2) potential industrial product sales growth in 2H12. We have also rolled over our investment horizon to YE13 and arrived at a new target price of Bt28, pegged to 0.5SD above SITHAI’s long-term average PER. We expect the stronger outlook to prompt a consensus forecast upgrade and boost sentiment toward the stock.
FY12-13 forecasts increased: We have raised both our FY12 and FY13 earnings projections by 16% to Bt502m and Bt577m, respectively. Our new numbers represent an FY11-14 earnings CAGR of 31.5%. The forecast solid earnings growth outlook is supported by stronger household product sales and solid prospects for industrial product sales growth. In our view, there is also scope for upside from GM expansion, as SITHAI has raised sales prices for OEM products (about 10% of total sales) by 5-7% and another price increase is likely.
Household product sales forecast upgrade: Our FY12 household product sales assumption rises to 7% YoY from 3% YoY to factor in strong 1H12 sales growth. Our new number incorporates the 10% price increase since July 1 and softer sales volume in 3Q12 (as customers were assumed to have stockpiled goods in 2Q12 in anticipation of the July 1 price rise). As such, there is scope for upside to our projection—we are now two-thirds of the way through 3Q12, but SITHAI yet to see a significant drop in household product sales volume.
Solid industrial product sales growth prospects: Industrial product sales rose by 24% YoY in 1H12, even though the contract with PepsiCo had yet to start. Other industrial product sales, such as plastic pallets and battery cases increased robustly. Looking ahead, 2H12 industrial product sales should expand HoH, due to solid beverage packaging revenue growth. FY13 plastic sales should jump 20% YoY because the revenue contribution from PepsiCo alone is expected to be Bt1.1-1.3bn.

Outlook
Explosive growth has yet to be priced in: Since our initial BUY call on July 19, SITHAI’s share price has jumped 24.2%, outperforming the broad SET by 23.4%. What’s next? After talking with management, we upgraded our FY12-13 earnings forecasts to factor in: 1) better-than-expected household product sales in 1H12 and 2) potential industrial product sales growth in 2H12. We have also rolled over our investment horizon to YE13 and arrived at a new target price of Bt28, pegged to 0.5SD above SITHAI’s long-term average PER. We expect the stronger outlook to prompt a consensus forecast upgrade and boost sentiment toward the stock. Our new profit forecasts are based on the following assumptions: 1) a three-year plastic sales CAGR of 16.7%, FY11-14, 2) a three-year melamine tableware sales CAGR of 5.3% (7% in FY12, 6% in FY13 and 3% in FY14) and 3) YoY gross margin expansion of 170 bps in FY12.

Household product sales forecast upgrade: Our household product sales assumption rises to 7% YoY from 3% YoY to factor in strong 1H12 sales growth. Our new number incorporates the 10% price increase since July 1 and softer sales volume in 3Q12 (as customers were assumed to have stockpiled goods in 2Q12 in anticipation of the July 1 price rise). As such, there is scope for upside to our projection—we are now two-thirds of the way through 3Q12 and SITHAI yet to see a significant drop in household product sales volume. The firm’s sales people report that the government’s budget for Village and Urban Communities has driven household product demand.

Solid industrial product sales growth prospects: Industrial product sales rose by 24% YoY in 1H12, even though the contract with PepsiCo had yet to start. Other industrial product sales, such as plastic pallets and battery cases, increased robustly. Looking ahead, 2H12 industrial product sales should expand HoH, due to solid beverage packaging revenue growth. The contract to supply beverage packaging for Pepsi’s operation in southern Vietnam, which commenced in July, started returning income to SITHAI in August. Management roughly estimates that August-December income from the contract will be Bt100-200m. The second contract to supply beverage packaging for Pepsi Thailand, which will commence in October, will contribute income of Bt80-100m this year.
A third contract to supply beverage packaging for Pepsi’s operation in northern Vietnam won’t contribute revenue in FY12. However, we estimate that beverage packaging sales to PepsiCo alone will make for income of Bt1.1-1.3bn in FY13. Furthermore, if SITHAI were to win one or more bids for new contracts to supply bottled water manufacturers, there would scope for upside.  We have, thus, revised up our FY11-14 industrial product sales projection CAGR to 16.7% from 13% previously. 

GM expansion: The impact of higher wages on GM in 2Q12 was weaker than we expected (GM dipped just 1% QoQ; we had assumed 2.3% slippage), due to operational improvements and because the minimum wage increase was initially imposed on only seven provinces. Management guides that wage costs will rise again in 1Q13 with nationwide implementation of the minimum wage. However, we believe that full-year recognition of a 10% rise in melamine tableware prices (since 3Q12) should outweigh the effect of higher wage costs in 1Q13. So, we expect FY13 GM to expand by about 30 bps YoY to 22%.
There is also scope for upside to our GM projection from OEM products (about 10% of total sales), the prices of which SITHAI increased by 5-7%; another price rise is likely. The OEM product price adjustments are part of the firm’s plan to eliminate low-margin (2-5%) OEM products from its sales mix. However, most OEM customers are Japanese automotive firms that prioritize quality, so it might take them some time to find other contract manufacturers that comply with their parameters. As such, if the OEM operation continues, it will do so on a fatter margin.

Recommendation and valuation

Good growth and cheap multiples: We have rolled over our investment horizon to YE13. SITHAI’s earnings growth profile is attractive, but its valuation remains cheap. The stock currently trades at an FY13 PER of only 9.2x, implying PEG of 0.6x, and a PBV/ROE ratio 0.08. We believe that the firm deserves higher multiples because of its ongoing transition to a fatter margin business model. Our YE13 target price of Bt28 is pegged to a PER of 13.2x, 0.5SD above SITHAI’s long-term average 10.7x.