Thai Foods Group

Thai Foods Group Plc (TFG) 

 

Investment Thesis

Although TFG’s 2015 operations were dampened by a weakened macro economy and chicken oversupply, we believe that its 2015 earnings sounded its bottom. Our view stems from an anticipated earnings turnaround in 2016, underpinned by tighter chicken supply and ongoing cost reductions. Apart from improving existing operations, the next growth phase will come from: 1) processed and value added foods, and 2) expansion into export markets. Our BUY rating stands.

Despite 2015—not trapped in the past

The earnings drop in 2015 was attributable to the lower chicken selling prices (Bt35.98/kg against Bt40.84/kg in 2014) and lower live pig price (Bt60/kg versus Bt70/kg in 2014). But this year, all such issues will recover and put TFG back on track, we believe. Our preliminary forecast is for a Bt120m core loss in 1Q16, or 77% shallower YoY and 53% QoQ, led by a higher live pig domestic selling price, lower corn and stable soybean meal prices and its cost efficiency program. Also, earnings in 1Q16 will benefit from higher chicken and live pig prices and sales volume due to the Chinese New Year. Chicken and live pig selling prices are expected to be Bt35.6/kg (down 2% YoY, but up 4% QoQ) and Bt59.7/kg (up 8% YoY and 1% QoQ) in 1Q16, respectively.

Turnaround plan No. 1—cost reduction program

The key support for its earnings turnaround this year will be its cost reduction program, including 1) modified feed formula, 2) reduced cost of local raw material (corn price expected to rise due to the drought), 3) increased feed-mill-production efficiency, 4) reduced benefits given to contract farmers, such as transportation expenses and 5) focus on inventory management. The firm targets to reduce chicken production cost to Bt36-37, against Bt40 in 2015. 

Turnaround plan No. 2—revenue expansion

TFG targets 15% revenue growth this year to Bt20bn, in line with our projection. The firm plans to increase revenue and mitigate risk from volatility in the chicken price by 1) increasing in export sales volume to 32k tonnes (up 255% YoY), 2) a JV company with its partner in Japan, 3) increasing pig capacity from 45k pigs/month to 54k pigs/month and 4) raising sales volume of feed to 16.5k tonnes/month (up 83% YoY). We maintain our Bt897m core earnings projection of 2016. We expect chicken prices to rebound to Bt42/kg in the current year (up 17% YoY) and expect live pig prices to rebound by 13-16% to Bt68-70 in 2016, led by consumption recoveries and a sustained tightening of supply.

Turnaround plan No. 3—promising scope for upside

A chicken sausage factory will be launched in Apr to add value to carcasses. TFG also plans to tap new sales channels via restaurant chains and boost its sales volume of swine parts by selling to Tesco Lotus. More upside will come from another JV company with a Japanese partner to produce cooked products. Another key support for its earnings in the future will be a pork sausage product and pet food.