GFPT

GFPT Plc  

 

GFPT’s price underperformed the SET a sharp 35% in 2015, in response to its 32% YoY fall in 2015 core earnings, hit by broiler oversupply. With spreads now widening, share price has turned up and has outperformed the SET by 9% YTD. We do not believe this incorporates the good year ahead with 16% YoY growth after the broiler oversupply was taken up, plus growth in equity income (off a low base and capacity expansion). The ongoing avian influenza in US that led to the ban on breeder imports and thus a shortfall in supply in Thailand, will add more catalysts from 2H16F. BUY with SOTP TP of Bt16. 

 

1Q16F earnings: Up YoY but down QoQ. In 2M16, broiler spreads widened by 8% from 2015 and 13% off 1Q15’s low base, backed by stabilization of product prices as the supply glut was taken up and feed costs came down. We expect 1Q16F profit to grow YoY from: 1) wider broiler spread after supply returned to normal; 2) better equity contribution with GFN back into the black after losses last year (broiler oversupply) as well as capacity expansion in 2H15. Earnings will fall QoQ from seasonality. 

 

2016F earnings back up. GFPT’s earnings are expected to turn back up to grow 16% to Bt1.4bn in 2016F. This will be backed by better sales and margin after broiler supply got back to normal, the benefit from the weakening of the baht against the US$ for its export sales, together with better equity income from GFN off last year’s low base in 1H15 and expansion of capacity for high-margin products in mid-2015. The US is still suffering from avian influenza and Thailand’s ban of import of breeders from the US (accounting for more than 50% of Thai breeder imports) since early 2015 cut breeder imports by 30% YoY in 2015. If prolonged, this will cut broiler supply, supporting price and spread from 2H16F onwards. 

 

LT plan to raise group integration level. GFPT plans to increase its group’s production integration, reducing non-integrated external sales to 15% in 2020F (only feed sales) from 30% in 2015 (feed and farm sales). This will help secure sales volume, increase economies of scale, and enhance margin over the longer term. To serve this plan, GFPT’s associates continue to expand capacity for high-margin products, which will funnel in more equity income. McKey just announced expansion of healthy-margin chicken processing capacity (+30%), scheduled to complete in 4Q17. After completing expanding capacity for a new high-margin product (+30%) in mid-2015, GFN is considering expanding another production line (+20%) in 2016-17F.  

 

BUY with end-2016 SOTP of Bt16. We like GFPT for its revival in 2016F, backed by normalized broiler supply. As a pure broiler play, it will benefit most if the bird flu in the US hangs around longer, cutting broiler supply in Thailand from 2H16 onwards. We derive an end-2016 SOTP PT at Bt16/share, applying 14x PE to its feed business, 12x PE to its farm business, and 16x PE to the food business.