Srithai Superware

Srithai Superware Plc (SITHAI)

Investment thesis
Although we expect a strong bounce in the top-line (backed by robust plastic sales growth), we are now more cautious with regard to 2Q13 core earnings. Higher wages would have squeezed GM in YoY terms and melamine sales growth was apparently slower than we previously assumed. As such, we have cut our 2Q13 core profit estimate by 10% and our FY13 core earnings forecast by 2%. Our YE13 target price is revised down to Bt28.6, from Bt31.5 previously. We maintain our BUY rating.

Robust plastic sales growth …
The utilization rate of non-alcoholic beverage plants rose strongly to 110% in May, according to the Office of Industrial Economics (OIE). As such, SITHAI’s beverage packaging sales should have been good. Furthermore, industrial plastic sales, such as plastic pallets and paint buckets, should have risen strongly with a utilization rate of around 80% during the quarter. We, thus, estimate plastic sales growth of 29% YoY in 2Q13. As plastic products account for the largest portion of SITHAI’s total sales, we expect that plastic sales drove total sales growth of 19% YoY during the quarter.
…but GM to rise only slightly QoQ
We have adopted a more conservative 2Q13 GM assumption. SITHAI raised wages by about 5% in April (following a wage rise in Jan in order to comply with govt policy). Furthermore, 2Q13 melamine sales were subdued, as consumer spending growth slowed. The melamine product line’s run rate inched up to 60% during the quarter from 55% in 1Q13 (it was 70-80% through FY12). As melamine contributes a fat GM, we have cut our 2Q13 GM assumption to 19.8% from 21%, previously. The QoQ GM rise is due to a smaller proportion of OEM products in the sales mix, lower raw material prices (PP, PE and HDPE prices softened by 3-4% QoQ in 2Q13) and baht depreciation.

Q2 2013 earnings to trough on extra items
We expect SITHAI to post a net profit of Bt109m for 2Q13, down by 10% YoY and 10% QoQ because of an asset write-off. The firm exited from a loss-making melamine business in China resulting in an asset-write off of Bt15m (the exit should boost net profit by about 2% per year). Our model indicates that 2Q13 GM will dive 125 bps YoY, but a sharply lower SG&A/ sales ratio will made for a core profit of Bt124m, up by 8% YoY and 3% QoQ.

Core earnings to improve in 2nd half 2013
Beverage packaging sales are set to rise in 2H13, as a SITHAI customer is expanding its production and melamine sales should rise QoQ in 3Q13 and peak in 4Q13 on seasonality, as should GM. As such, we expect core earnings to rise QoQ in both 3Q13 and 4Q13. We anticipate that 2H13 core profit will jump 32% HoH.