Srithai Superware

Srithai Superware Plc (SITHAI)

Investment thesis
SITHAI’s 4Q13 core profit is likely to fall short of our previous estimate—the twin effects of the consumption slowdown and delayed payments under the Rice Pledging Scheme will probably make for lower melamine tableware sales than we earlier assumed. As such, we have trimmed our FY13-14 earnings projections and de-rated our target PER from its long-term mean of 11x to a peg of 9.5x (0.25SD below its long-term average). Consequently, our YE14 target price drops from Bt21.2 to Bt17.90. But SITHAI’s current low valuation (an FY14 PER of only 8x) and high dividend yield of 6.6% should support its share price. HOLD.
Cut 4Q13 core earnings estimate on weak melamine sales
We have trimmed our 4Q13 earnings estimate by 5% to Bt133m, due to a lower expectation for melamine tableware sales. 11M13 tableware, kitchenware and sanitaryware sales volume in Thailand slipped 6.4% YoY, according to the Office of Industrial Economics. We believe that SITHAI’s melamine sales will fall more steeply than the nationwide number, due to its high 4Q12 base comparison (SITHAI’s tableware distributors sold tableware products heavily ahead of price rises in 1Q13, which skewed up the 4Q12 sales number). Plastic should post strong growth of 14%. But the 4Q13 top-line may report only a 7% rise, slowed by weak melamine sales.
We have also trimmed our earnings forecasts by 1.4% for FY13 and by 1.3% for FY14, on diminished melamine sales growth assumptions.
Firm eyes 20% top-line growth for FY14 (too optimistic, we think)
SITHAI has set a top-line growth target of 20%, driven by plastic sales growth of 22% (trading business growth of 15% and melamine sales growth of 10%). The firm’s target is much more bullish than our current assumption. Consumption spending among low-income demographics will remain slow in 1Q14 on delayed Rice Pledging Scheme payments by the state. Thus, we conservatively assume top-line growth of only 10%, led by plastic sales growth of 13% (trading business revenue growth of 4% and melamine sales growth of 3%). Despite our conservative assumptions, our model still implies an FY14 PER of only 8x at the current share price, far below its long-term average of 11x.
Opportunity for business expansion in Indonesia
SITHAI plans to set up a joint venture with a local partner in Indonesia (SITHAI will hold 65%) to make enclosures (bottle caps) for a big soft drinks firm. If the JV deal were to be sealed by March and the firm were to win the contract, production would start in 3Q14. At full capacity, the JV would contribute Bt400m/year in revenue, suggesting 1% scope for upside to our current FY15 earnings forecast. Business expansion in Indonesia might also open opportunities to launch packaging, bottle preform and plastic pallet manufacturing lines.