Thaifoods Group

We believe that TFG’s earnings had already bottomed out in 4Q15, and anticipate a bottom-line breakeven in 1Q16 before a turnaround in 2Q16 and the posting of a strong bounce in 2H16. This will be led by a recovery in chicken and live-pig prices, capacity gains and its cost efficiency program. We recommend skipping past FY15 net loss and looking forward to FY16 earnings. Apart from improving existing operations, the next growth phase will come mainly from export opportunity growth and processed food. Our BUY rating stands.

Insights into 4Q15—deeper in the red than modeled

We estimate a Bt305m net loss for 4Q15, a reversal from a Bt23m net profit in 4Q14 (led by lower chicken and live-pig domestic selling prices), or deeper in the red by 11% QoQ (thanks to the livestock business low season). Stripping out an extra item—a realized FX gain of Bt40m—core loss will be Bt345m, a reversal from the Bt55m core profit in 4Q14, or 31% deeper in the red, QoQ. The much deeper 4Q15 core loss estimate (our earlier forecast was Bt300m) is due to lower-than-assumed chicken and live-pig prices (Bt37/kg, against Bt39 in 3Q15 for chicken, and Bt61/kg, against Bt65.5 in 3Q15 for live pig). 

The chicken price has recovered only slightly while the pork price remained the same after the Vegetarian Festival. Although the lower corn and stable soybean meal prices will be positive factors for 4Q15, they will be outweighed by the inventory impairment as a result of the decline in chicken prices. Sales in 4Q15 will be Bt4.5bn, up 6% YoY but down 10% QoQ. Disaggregated by business unit, revenue from its poultry business dropped 7% YoY and 10% QoQ. Revenue from its swine business jumped 48% YoY but dropped 9% QoQ, while revenue from its feed and other businesses leaped 21% YoY but slid 12% QoQ.

FY15 deeper in the red 

We have revised our FY15 core loss estimate deeper by 3% to Bt1.5bn. However, we maintained our FY16 earnings estimate of Bt897m, based on anticipated tighter chicken supply (led by the shortage of breeders and other chicken from widespread bird flu in the US, the UK and Germany in 2015) and ongoing cost reductions through the feed formula adjustment, chicken breeder cost reduction and the reduced benefits given to contracted farmers with its target to reduce chicken production cost to Bt37-38/kg, against Bt40 in FY15. 

Promising plans to support growth

The key supports for sunny skies ahead would be 1) ready-to-eat products; it plans to set-up its own chicken sausage facility, expected to be completed and operating in 2Q16, 2) expansion in export business; it seeks to raise the proportion of revenue from exports to 15% of its revenue, against 7% in 2015, including revenue from its JV company in Japan, 3) capacity expansion; it aims to add a production line at its Kabin Buri plant in 2Q16, which will increase total existing capacity of its slaughter house by 25% and feed production capacity by 60%.