Agri-business sector

Agri-business sector

 

- High season, weak THB are major drivers 

The agribusiness and food sectors have become increasingly interesting. SETFOOD and SETAGRI have declined 3.0%ytd and 6.6%ytd, respectively, underperforming the market, whereas their fundamental factors are likely improving. Earnings would continue growing in 2Q15 and peak in 3Q15, which is a high season of worldwide food business. Moreover, there has also been benefit from average THB since the beginning of 2Q15 until present that is standing at B33.08/US$, weakening 1.3%qoq and 1.9%yoy. Considering by company, CPF, GFPT, TUF, STA, and KSL would all show net profit growth in 2Q15, led by CPF and GFPT as domestic livestock product prices would improve from 1Q15 and their chicken export would increase. Likewise for TUF, tuna price would get back to an uptrend, thus helping increase orders from OEM customers. STA would be able to post net profit growth in 2Q15 as well for average rubber sheet price since the beginning of 2Q15 has risen 2.8%qoq to US$1,780/ton. For KSL, although an average sugar price in 2Q15 has lowered 12.5%qoq to US$0.134/pound, the company still has B120m fair value gain from a commodity swap. 

 

- Upgrade to OVERWEIGHT 

Thanks to the aforementioned positive factors, we upgrade our recommendation for the agribusiness-food sector from NEUTRAL to OVERWEIGHT. Although the sector's FY2015 earnings are projected to fall 12.0%yoy because TUF has recognized B1.4bn extraordinary expense from the acquisition of Bumble Bee and no massive extraordinary profit like CPF's B4.7bn non-recurring profit from sales of investment in 2014 would be booked, the sector's normalized profit is estimated to jump by 27.8%yoy in 2015 and 36.4%yoy in 2016. There would also be an upside from weak THB in 2015 since YTD average THB of B32.83/US$ is close to our assumption of B33/US$. Every B1 depreciation is expected to boost the sector's profit by 4.5% from the forecast. 

 

- Favor CPF, TUF 

Top picks are CPF(FV@B28) and TUF(FV@B26) for their potential earnings growth owing to weak THB. They have high upsides, so this is a good entry point.