Berli Jucker

Berli Jucker Plc (BJC)

Action and recommendation
Initiate coverage with an Underperform rating, 2013 fair value of Bt48.5. We initiate coverage on BJC with a DCF-based 2013 fair value of Bt48.5/share (PER 26x). BJC is trading at a 2013 PER of 34x, the highest in its sector (while some of its peers show more attractive growth prospects). Even though we like BJC as it is a conglomerate with strong support from the TCC group and has the potential to benefit from ASEAN growth in the near future, the recent rally in its share price (+62% in 3 months) makes it too expensive compared with its current fundamentals. Therefore, we view this time as a good opportunity to take profit. We thus rate the stock as Underperform.

Key Investment Points

Profit to grow 18% CAGR over 3 years. We expect BJC to report a CAGR of 18% during 2011-14, supported by improving sales at all its businesses (15% CAGR). Packaging sales will remain the biggest contributor to its top line although its consumer business will grow at a faster rate. However, we expect its gross margin to decline slightly to 24.6% in 2014 from 24.9% in 2011 due to a softer margin at the packaging business during an expansion phase. Still, net profit margin is expected to widen to 7.39% in 2014 from 6.97% in 2011 on improved SG&A to sales and a lower tax rate.

Secured orders from its parent group company. BJC has three well-established businesses. Of these, packaging generates the biggest portion of total revenue (50%) followed by consumer products (30%), and healthcare, technical and other products (20%). Thanks to the strong performance of its related and parent companies (under the TCC Group), 38% of its packaging sales (Glass and Aluminum Cans), or 18% of its total revenue, is secured. While this is a big portion, the remaining 62% still comes from non-related companies, indicating a nice diversification that is the result of its good product quality and reputation. Moreover, the recent acquisition of F&N by the TCC Group will provide more growth possibilities for BJC.

Growing with the AEC. BJC has experience in most ASEAN countries, with 12.5% of revenue coming from its international operations. The company will thus gain from rising ASEAN economic consumption after the commencement of the AEC in 2015, which in particular will open room for its packaging business to grow. In addition, the company is in the process of acquiring one of the biggest local distributors in Vietnam, with the deal expected to be finalized at end-2012. Combined with BJC’s current distribution channel (Thai Corp VN), this will make BJC the biggest distributor in Vietnam. BJC has also revealed an interest in investing in distribution networks in Cambodia, Laos and Myanmar, creating another engine that will boost revenue and earnings of its consumer products business.

Downstream supply chain to add more value. A downstream supply chain may be required for BJC to avoid margin cap risk as it has lower bargaining power with large retailers. A proposed medical shop chain is undergoing a feasibility study and this may be a good way for BJC to solve this problem as it could become a big selling channel for many of BJC’s products. At the same time, it may choose to approach the market from the other end by going upstream to become a producer of medical supplies. However, as there is no solid plan on this for now; we have not included it in our projections, leaving it as potential upside to our current estimates.

Risk
Upside risk to our current forecast from new M&As and any new investments.
 

Key Investment Points
Well Balanced Industrial Supply Chain Business (Packaging)
Strong support from related companies
38% of packaging revenue comes from sibling companies…
Packaging is BJC’s most important unit, accounting for about 50% of revenue and 60% of net profit. Strong support from related companies in the TCC Group (its parent company), particularly ThaiBev, one of the largest alcoholic and non-alcoholic beverage companies in South East Asia, has enhanced and stabilized BJC’s sales and earnings in the packaging business (glass and aluminum cans). For example, 25% of revenue from aluminum-can packaging generated by Thai Beverage Can Company (TBC), a subsidiary of BJC, comes from ThaiBev’s Chang Beer unit (75% of total production of the Chang Beer brand) while 50% of demand for BJC glass packaging in Thailand, comes from ThaiBev. This implies that 38% of BJC’s industrial supply chain revenue (and about 18% of total revenue) is secured from group companies.
..But non-related companies account for a bigger portion
However, the remaining 62% comes from other companies, which shows that BJC is not dependent on orders from within the group and reflects the strong reputation it has built providing quality products to well-known customers such as Redbull, Nestle, Asia Pacific Breweries, Coca Cola, Pepsi, Unilever, F&N and Cerebos.
More acquisitions by its parent company, and more growth potential for BJC
There are possibilities for BJC to get more orders from TCC Group, which recently bought F&N, and any new companies (alcoholic or non-alcoholic beverages) that TCC or ThaiBev may acquire in the future. F&N is a large Food & Beverage, Properties, and Publishing & Printing company in the region with a large portfolio of own brand soft drinks (carbonated drinks, isotonic drinks, tea, milk, juices, and bottled water) and one of BJC’s existing clients. There is a possibility that BJC may get more aluminum can orders from these companies, especially for carbonated and isotonic drinks and tea. We view an expected aluminum can capacity expansion in Thailand in 2013 (up about 26%) and the potential to add 1-2 lines at its Vietnam operation (TBC Ball VN, which just opened in May-12) will give BJC the ability to handle more orders in the future. There is also the chance that F&N will launch new products in glass packaging.
In addition to F&N, the new returnable bottle OISHI green tea launched and distributed by SSC in 2H12 will be a source of new orders for BJC’s glass business. There is also a possibility that BJC will get more orders from SSC’s new “est” carbonated drink. However, based on the expected high capacity utilization rate of 92% in the glass business and 88% in the can business in 2012, we aren’t bullish on the growth of packaging sales in 2013.

Costs are well managed
As packaging has a narrower gross margin compared to other businesses, cost management is very important. BJC was affected by the mismanagement of raw material and energy costs during a period of high price volatility from 4Q08 to 1Q09. Its gross profit margin fell by 5-6% pp. from the mid-teen level previously. After that, the company stopped using a 100% hedging policy and turned its attention to amending its trading agreements with customers. The new contracts allow BJC to increase the selling price if the cost of raw materials changes in excess of a border agreement. This new cost-management methodology has helped its gross margin improve from 13.6% in 2009 to 22.2% in 2010 and 20.6% in 2011.
Looking forward, the stabilization of the soda ash price and downtrend of the aluminum price (Fig 3-4), which are the major raw materials and costs of its packaging products (Fig 5-6), will benefit BJC’s industrial supply chain operation.

But new capacity expansion will put short-term pressure on margin
Packaging gross margin is expected to soften in 2012-14 before improving from 2015
In 2012-2014, BJC plans to boost its packaging capacity. As the expansion phase will necessitate higher costs (test runs, depreciation, defective products) while the utilization rate won’t yet achieve economies of scale, this will have a negative impact on the packaging business’s margin. In 1H12, the business’s gross profit margin dropped slightly to 18.9% from 20.6% in 2011 due to the opening of BJC’s new aluminum can plant in Vietnam (TBC Ball Vietnam). However, the negative impact is expected to ease in the next 2-3 years (from 2015 onward) following the completion of the expansion phase for both glass and can production. We expect packaging’s gross margin to decline from 2011 to 18.3%, 18.5% and 19.0% in 2012, 2013 and 2014 respectively, then to improve to 20.7% in 2015, and 21.5% in 2016-2017 as seen in Fig 7.
Current construction plan is just for replacement capacity
The addition of second and third furnaces at BJC’s Saraburi glass packaging plant (Thai Malaya Glass; TMG) in 1Q13 and 2Q14, respectively, (about Bt3bn capex in 2012-2014E) is not real new capacity, but to replace the closing of the Ratburana plant (Thai Glass Industry; TGI) scheduled for 1Q13 to 1Q14. Therefore, we expect the full glass capacity of BJC in Thailand will be unchanged from 2012 and 2014 (Fig 8). Note that the allocation of production to TMG in Saraburi will allow the company to enjoy better energy cost controls (change from fuel oil to natural gas).
Though there is no plan for a real glass capacity expansion, the company has secured land near the Saraburi plant for a further expansion in the future. This could boost capacity by up to three furnaces (from three furnaces at the end of 2014). 
Expansion of aluminum can packaging
BJC plans to expand capacity of its Thai can production in 2013 (Line 8 of its Can production and Line 4 of its End production- the cover portion of a can) by about 26%. Outside of Thailand, we also see a high possibility that its Vietnam operation (TBC Ball VN) will add 1-2 more production lines in a few years as its recently opened plant is expected to run at an almost 70% utilization rate by the end of 2012 (its first year of operation). There is an available area nearby TBC Ball that would permit the company to expand by another 1 to 2 lines. However, BJC has not revealed any expansion plans for the Vietnam plant.

Tough Consumer Supply Chain Business (Consumer Products)
Adding new products and new sales channels
Health-related products to boost top line and margin
We see limited margin growth for BJC’s existing consumer products due to the prevailing high production, transportation and selling costs. In addition, competition is stiff, with price and promotional campaigns the typical marketing tools in this industry. The growth of big department stores and hypermarket chains is also eroding the company’s profit margins. That’s why the net profit margin for consumer products is the lowest in BJC’s portfolio (Figure 9). Better growth and margins could come from adding new high-margin products to its portfolio and adjusting its product mix. The company is aiming to add more health-related products not only to respond to the trend of more health-conscious consumers, but also to improve its margin.
Direct to home is a potential new sales channel
BJC has added a new direct-to-home (DTH) sales channel, starting with Danone dairy products (Figure 10). It is targeting a DTH sales force of 800-1000 salespeople by the year 2015, up from about 100-200 at present. If this proves successful (no data is available yet due to its recent launch), we expect this new sales channel may be adapted for other products and to boost sales volume in the consumer product business.

Healthcare & Technical Supply Chain Business
No solid plan for downstream expansion to retail shop in the near future
Like its consumer product business, BJC’s healthcare products have come under pressure from the strong bargaining power of the large retailers and hospital chains. The business’s profit margin has also come under pressure. A chain of medical shops opened either under its own brand or under an existing well-known brand from Japan could be a good strategy to solve this problem. We see this as one way for BJC to fulfill the downstream of its supply chain. Such a drug store chain could not only sell drugs but also small medical equipment, cosmetics, personal care products, and snacks -- all categories in which BJC has its own products. This would also help it improve its margin, in our view.
However, as BJC has revealed no solid plans yet, we have not included this potential new business in our projections. As such, it may provide a large upside risk to our current projections if there is any confirmation of the plan from the company.

Or go upstream?
If the company chooses to go upstream by opening its own medicine-production facility rather than just buying from others and selling it (mid-stream), it will have to invest more in manufacturing facilities and marketing expenses. BJC claims that its knowledge of customers’ demands from its many years of experience in the healthcare business would help its products quickly win acceptance from consumers. However, in our opinion, the products may struggle with lower brand recognition in the first phase of the launch.

Growing with the AEC
Experienced in ASEAN market
BJC has solid experience in most ASEAN countries as a result of its direct investments and export activities (Fig 12).
In terms of direct investment, BJC has plants in Vietnam and Malaysia. BJC’s operation in Vietnam now includes glass manufacturing by Malaya Vietnam Glass: MVG, aluminum can manufacture by TBC Ball Bev. Can VN and a logistics firm, Thai Corp International Vietnam (one of the biggest distribution and logistics firms in Vietnam). Apart from Vietnam, BJC has businesses in Malaysia, namely Malaya Glass Product SDN BHD (Malaysia‘s largest glass packaging producer).
In addition to direct investments, BJC exports products (Cellox, Doso, Party, Parrot soap, and beverage containers) to Cambodia, Laos and Myanmar.

Demand for glass and aluminum cans depends mainly on alcoholic drink consumption. Even though beer consumption in Thailand has dropped since 2008, packaging sales of BJC have still been able to grow (Fig 13). This was partly due to the acquisition of glass manufacturing businesses (TMG, MVG and MGP) in 2010. In the future, we believe the growth opportunities for BJC’s packaging businesses will come from ASEAN. Fig 14 shows alcoholic drink consumption per capita of other ASEAN countries, which are still below the level of Thailand and other developed countries. This implies there is much room for BJC to grow its packaging capacity in the future.

One of the first Thai companies to capture ASEAN’s growth
With its strong distribution network, BJC will be one of the first Thai companies to benefit from rising consumption in ASEAN (See Fig 15-16). Following the startup of the AEC in 2015, BJC should grow very fast, thanks to its current solid exposure despite its small business size right now. At present, BJC has only one small tissue product plant in Vietnam and a small snack manufacturing plant in Malaysia. The next step might be to build more consumer products plants in ASEAN. Moreover, the construction of retail outlets in Vietnam is possible but there is a way to go for that process in our view.
In 2011, international revenue accounted for 12.5% of BJC’s total revenue, up from just 2.7% in 2008 (implying 87% CAGR sales growth during 2008-2011). Most of this came from ASEAN markets as shown in Fig 17-18. We expect the strong growth will continue in line with the company’s strategy to expand business in ASEAN and we expect BJC’s international businesses will contribute as much as 17% of total revenue in 2014 without any new acquisitions except for a VN distribution center.

Potential acquisition of distribution business in CLMV
There are a lot of opportunities for BJC in ASEAN, particularly in Cambodia, Laos, Myanmar and Vietnam (CLMV). BJC is in the process of acquiring one of the biggest local Vietnamese distributors (expertise is in Northern Vietnam, centered in Hanoi). The deal is expected to be finalized at end-2012. Together with its existing owned distribution channel of Thai Corp VN (expertise in Southern Vietnam, centered in Ho Chi Minh City), the deal will make BJC the biggest distributor in Vietnam. The size of the acquisition is Bt1-3bn.
The company also revealed it is interested in investing (greenfield, JV, or via an acquisition) in distribution networks in Cambodia, Laos and Myanmar. However, it has yet to disclose any details of its plans.

Industry Overview
Glass Packaging Industry
Glass packaging is BJC’s major source of income, generating 32% of total revenue. Glass packaging is an industry that requires high levels of investment and technology. The operation must run 24 hrs a day because of the high cost of turning the furnaces off and on again. As a result, there is a high barrier to entry for the newcomers without secured orders on hand. Major customers of the glass packaging industry are Food & Beverage companies.
The utilization rate of glass packaging production in Thailand in Aug-12 stood at 84%, the same level as in Dec-11. This is slightly below BJC’s glass production in Thailand, run by Thai Glass Industries (TGI) and Thai Malaya Glass (TMG) with a utilization rate of about 88% in Dec-11. We found that in 2011, BJC controlled 67% of Thailand’s glass bottle production of 1,286,271 tons/yr., up from only 56% in 2008 (Fig 20), due primarily to the increased stake in TMG in 2010. The other big players in the market are Bangkok Glass Industry and Siam Glass Industry.
Together with the production of Malaya Glass Product SDN BHD (MGP) in Malaysia and Malaya Vietnam Glass Limited (MVG) in Vietnam of 230,637 tons/yr., BJC claims to be the biggest glass packaging manufacturer in ASEAN.

Aluminum Can Packaging Industry
Aluminum can packaging accounts for about 15% of BJC total revenue, making it BJC’s second-largest revenue contributor.
Aluminum can packaging also requires heavy investment and technology. It needs only a small work force for the production line while being dependent on machinery. There are 4 major can producers in Thailand with Thai Beverage Can (TBC), a subsidiary of BJC, the market leader with a 44% market share. Other rivals include Bangkok Can Manufacturing (JV with Japanese Toyo Seikan), NCI Packaging, and Carnaud Metal Box (CMB) under Crown Holdings from UK. As the industry requires high technology, most of the major players are foreign companies or joint ventures (JV) between Thai firm and international companies. For example, TBC is a 50:50 JV between BJC and Ball Corporation form the US (the world’s largest can manufacturer). At end-2011, BJC had a total capacity in this business of 1,750 million cans/yr and ran at a 91% utilization rate.
Key drivers of sales growth in the industry are GDP growth, population growth, and growing alcoholic-drink demand.
Consumer Products Industry
The consumer products business accounts for 30% of BJC’s total revenue and many of the lines are in the top three in their market. This business has faced tough competition from many competitors in the market, changes in consumer preference, and the availability of substitute products. Therefore, brand recognition is a key factor for success in the business.
Snack Industry: The market size of the snack business was estimated at Bt23.5bn in 2011, with average growth of 10% during 2007-2011. Potato chips have the biggest portion (31%) with 70% of that going to Frito Lays, followed by the 15% held by BJC’s Tasto. Other types of snack include extrusion snacks (31%), seaweed (9%), nut snacks (8%), fish snacks (8%), prawn crackers (5%), squid (4%), rice crackers (3%), and popcorn (1%). BJC’s Dozo is the leader in the rice cracker category with a 75% share.
Tissue Industry: The market size of tissue industry was around Bt5bn in 2010, with average growth of 7% per year. This can be divided into toilet paper (70%) and facial tissues (30%). The leader in the market is Kimberly Clark (Kleenex and Scott brands) with about a 40% market share followed by BJC’s Cellox with a 35% market share. The market has faced tough competition from house brand tissues by some retailers.
Soap Industry: This industry has a market size of around Bt7.8bn. The biggest player is the Lux brand of Unilever.
 

Financial Highlights
1H12 profit accounts for 49% of our 2012 full-year estimate. We expect BJC’s net profit to grow to Bt2,454mn (+12.7% YoY) in 2012, driven by 18.7% YoY sales growth from all business segments. We expect packaging revenue (+17% YoY) to increase on the back of rising demand for glass and can containers together with a larger contribution from TBC-Ball VN. Strong sales of consumer products (+19% YoY) are being driven by both food and non-food products. The lower profit than sales growth is due to a slight drop in gross margin as a result of pre-opening costs at the new plant in Vietnam together with higher raw material and energy costs.
Expect net profit to grow 20% YoY in 2013. We forecast BJC’s 2013 net profit will rise by a further 20% YoY to Bt2,950mn. The expected 14% YoY revenue growth will be driven mainly by the aluminum can packaging business, both from capacity expansion in Thailand and the ramping up of the utilization rate at the Vietnam plant. We also expect consumer revenue to grow nicely from a greater contribution from the distribution business in Vietnam. Net profit margin should also improve (6.98% from 6.62% in 2012E) thanks to a slight increase in gross margin (24.37% from 24.12% in 2012E), lower SG&A to sales (15.02% from 15.26% in 2012E) and a lower corporate tax rate in 2013.
Forecast:  18% CAGR over the next 3 years. Over the next 3 years (2011-2014), we expect BJC to report net profit growth of 18% CAGR on improving sales across all business categories (15% CAGR) as seen in Fig 21. Packaging sales will remain the biggest contributor to BJC’s top line but drop in terms of revenue from 47% to 44%. The consumer business will grow faster (30% to 33%) on existing and new products (also Danone) and the distribution business. However, we expect its gross margin will remain flat from 2011 to 2014 (dropping in 2012-2013 before picking up in 2014) thanks to a better diversification of business, which will offset the softer margin of the packaging business during the expansion phase. Economies of scale will lower SG&A to sales to 14.7% in 2014 from 15.5% in 2011. Along with the government cut in the tax rate from 30% in 2011 to 20% in 2013-2014, net profit margin is expected to rebound to 6.98% in 2013 and 7.37% in 2014 from 6.97% in 2011 and 6.62% in 2012 (Fig 22).

Solid balance sheet. At the end of 1H12, BJC had an interest-bearing-debt-to-equity ratio of 0.73x, much below its debenture covenant of 1.75x. Moreover, it should have much more room to raise funds by debt financing in the future as its equity should grow by 20% to Bt18.6bn in 2013 from Bt15.4bn in 1H12, based on our projections. This should allow BJC for make further big M&As and investments. We assume capex of Bt4bn, Bt4.2bn and Bt4bn in 2012E, 2013E, and 2014E, respectively, to support the current expansion plan.

Valuation & Recommendation

Fair value of Bt48.5/share. Using a Discount Cash Flow methodology (DCF), we derive BJC’s fair value at Bt48.5/share at the end of 2013 (assuming a full dilution of 16 million ESOP shares in 2013). This fair value reflects a 2013 PER of 26x and a PBV of 4.2x.
Our key assumptions are:
 8.3% WACC from 40:60 of debt: equity weight, 11.24% cost of equity (risk-free rate of 3.75%, equity-risk premium of 7% and 1.07 beta) and 5% cost of debt, and long-term growth of 3%.
Unattractive valuation
 

Expensive compared to peers. BJC trades on the SET under the Commerce Sector. If we compare the company to its Thai commerce peers under our coverage (Fig 23-24), we find that BJC’s price is not interesting. It is trading at 34x PER in 2013 (the highest among its Thai peers) while its 2013 earnings growth is below that of HMPRO, ROBINS and CPALL. Moreover, its ROE is the lowest even though its PBV is in the middle of the group. In terms of dividend, we expect BJC to pay only a 1.3% dividend yield in 2013 (on a 50% payout ratio), much lower than the average of its commerce peers at 3%.

Trading at high range of its historical PER and PBV. After the recent robust rally in its share price – up 62% in 3 months -- due to high expectations by investors on its future growth prospects both from the potential acquisition of a retailer and the benefit from the recent M&A of its related company in the Food and Beverage sector, BJC’s share price is now trading at historical highs for PER and PBV (Fig 25-26). It also much more than 2 times its standard deviation for the past 5 years. Given the high level of the trading price, which is 23% above our 2012 fair value, we initiate our coverage of BJC with an Underperform recommendation.