Srithai Superware
Re-rating on the agenda
Srithai Superware Plc (SITHAI)
Investment thesis
We believe that SITHAI’s remarkable outperformance during recent months has yet to fully reflect the scale of its operational improvements. After a conference call with management, we feel that we were too conservative in our previous forecast. As such, we have raised our FY12-13 earnings forecasts by 1% and 6%, respectively. SITHAI remains a conviction BUY for its near-term earnings visibility and forward profit growth outlook. The current share price implies an FY13 PER of 13x, 0.5SD above its long-term mean. We view that the stock has scope to re-rate to a PER of 15x, which translates into a new target price of Bt34.25.
Solid top-line growth expected—2H12>1H12
We anticipate top-line expansion of 18% for both 3Q12 and 4Q12. The government’s rice-pledging scheme has boosted purchasing power in the provinces—the target market for melamine tableware. Furthermore, a melamine product price hike (of around 10%) should fuel melamine sales growth. As such, SITHAI’s melamine product sales growth target of 7% YoY looks achievable. Additionally, increasing domestic demand for paint pails, plastic pallets, plastic crates and battery cases will drive plastic sales growth of at least 21% in 2H12.
Broad improvements in 3Q12—earnings growth of 205% YoY
We anticipate SITHAI’s 3Q12 profit at Bt128m, up by 6% QoQ and 205% YoY. Solid top-line growth, further GM expansion (22%, up 200 bps YoY) and good operating cost control (an SG&A/sales ratio of 14.5%) are likely to have outweighed the effect of higher wage costs. Growth momentum will continue through 4Q12, fueling explosive earnings expansion of 78% YoY for FY12. Looking to FY13, we anticipate profit growth of 21%, led by further plastic product sales and GM expansion.
Overseas expansion entails scope for upside …
The firm is studying the feasibility of setting up a JV plastic product factory with a Japanese partner in Indonesia with an investment budget of about Bt500m. The deal is targeted to be finalized in FY13 or FY14. SITHAI already has a melamine factory in Indonesia that accounts for 10% of its total melamine capacity (of 13,500 tonnes/year). In order to avoid cannibalizing current sales, the new JV will focus on serving local demand for plastic products. Additionally, there is scope to expand bottle cap sales in other areas, such as the Philippines, Myanmar and Cambodia.
…putting a valuation re-rating on the agenda
Ongoing fundamental improvements coupled with upside from overseas expansion will prompt a valuation re-rating. SITHAI currently trades at an FY13 PER of 13x, about 0.5SD above its long-term average of 10x. Based on an FY13-15 earnings CAGR of 15%, we believe the stock has the potential to re-rate to an FY13 PER of 15x (PEG of 1x), which translates into a new target price ofBt34.25.
