Oishi Group

Oishi Group Plc
Event
-  We remain positive on OISHI’s growth prospects for new product launches and its cost-saving investment in a cold-filling line. We view 3Q12’s losses as temporary and expect a strong recovery into 2013. We maintain our OP rating on the stock with an unchanged 2013-end DCF target price of Bt240.
Impact
- Beverage business, expect recovery from production resumption. OISHI indicated that it outsourced UHT green tea production at a loss to maintain market share during 3Q12, which depressed its gross margin. With the UHT filling line having fully recovered from the flood in November 2012, we expect the gross margin to recover in 4Q12. Cold-filling Lines 1 and 2 are scheduled to start production in late 4Q12 and 2013, respectively, which should improve the profitability of PET bottle green tea by Bt2/bottle.
- Food business, strong expansion in the pipeline. OISHI opened 39 restaurant outlets in the first 10 months, and is well on the way to achieving its plan to open 50 outlets this year. It plans to open 50 restaurant outlets every year during 2012-15 along with hypermarket openings. We believe the opening of a new central kitchen in 2Q12 should reduce its logistics costs and help it cope with the increased demand from the rapid restaurant expansion.
- New products, high SG&A a necessary investment. 3Q12 SG&A to sales is very high at 28.2% vs the historical range of 20%-24%. The high level of SG&A was due to high advertising expenses related to the early introduction of its returnable glass bottle green tea and a seaweed snack during the quarter. We believe this aggressive marketing campaign is necessary to stimulate awareness, and the company expects the spending to wind down in succeeding quarters when the market reception is already high.
Earnings and target price revision
- We revise our 2012 EPS estimate down by 32%, on the 3Q12 losses, and keep 2013-14 EPS estimates unchanged.
Price catalyst
- 12-month price target: Bt240 based on a DCF methodology.
- Catalyst: Production resumption, commencement of a cold-filling line and central kitchen
Action and recommendation
- We believe the 3Q12 weakness was a temporary event and expect the company’s profitability to recover in 4Q12 onward, driven by the resumption of in-house production capacity and cost-saving investments. At a PER of 18.0x on 2013E, with an aggressive expansion plan to capture.
- growing consumption upcountry, we reiterate our OP rating on OISHI, keeping the target price unchanged at Bt240, and view the recent share price correction as an opportunity to accumulate the stock.