Srithai Superware

Srithai Superware Plc (SITHAI)

Investment thesis
We have renewed optimism over SITHAI’s earnings growth outlook and expect the stock price to resume rising ahead of the release of 2Q13 numbers. Furthermore, we anticipate QoQ core profit expansion through to 4Q13. Note also that the chances of a consensus FY14 bottom-line forecast upgrade are good—SITHAI is starting two new ventures and may possibly win a new beverage packaging sales contract. The stock currently trades at a core PER of 11x, lower than its long-term average core PER of 12.5x. Apart from its cheap valuation, the dividend yield of 6% is much better than the yields of most other SET-listed firms.
Plastic sales—the key earnings booster
Plastic sales (especially beverage packing) will drive top-line growth in FY13, which we forecast at 29%. SITHAI has secured revenue through two three-year contracts with a global soft drinks company; other beverage packaging sales deals are the pipeline. Moreover, its food packaging sales should expand swiftly in tandem with the rising popularity of ready-to-eat meal boxes—we roughly estimate the firm’s food packaging sales growth at 44% for FY13.
GM expansion
Gross margin should fatten QoQ, starting 2Q13, led by a sharply lower proportion of low-margin (OEM) products in the sales mix—down from 26% in FY12 to 17% in 1Q13. SITHAI targets reducing the proportion of OEM products in the sales mix to 14% by 4Q13 and to less than 10% by 4Q14. Moreover, melamine GM should increase as a result of baht depreciation in 2Q13—from an average of Bt29.8/dollar to 30.6 recently. Over the longer term, the proportion of revenue from exports will decline to below 20%. As such FX-fueled GM volatility will ease substantially. 
Exiting the melamine business in China will boost net margin
SITHAI recently exited its 40% stake in a melamine business in China—Beijing Huatai Replica of Porcelain Products Co Ltd. The Chinese associate firm typically posted net losses of about Bt10m/year. The divestment will mean no more losses to book after 2Q13, which will boost net margin. As such, we have revised up our FY13 earnings forecast by 6% to Bt620m. We have also raised our FY14 earnings forecast by 5% to Bt700m to fine-tune for a lower SG&A/sales ratio (see Figure 3). However, our YE13 target price remains unchanged at Bt31.5, as it is pegged to SITHAI’s FY13 core PER. 
Scope for earnings upside
Our model has yet to include: 1) SITHAI’s 65% stake in a new furniture factory (a JV with an Italian firm), which management claims may generate sales of around Bt200m/year, 2) a possible new beverage packaging contract worth about Bt300m/year and 3) business expansion in India (Bt200-500/year in revenue).