Oishi Group

Oishi Group Plc (OISHI)

Maintain Outperform rating with new Bt240 TP
We roll over OISHI’s target price to end-2013 and derive a new DCF-based target price of Bt240 (representing 27.8x 2013E PER) from Bt195 at end-2012. We believe OISHI will benefit from Thailand’s growing provincial affluence and aggressive expansion in all its business segments. This growth is supported by the ongoing rapid expansion of all retail formats in the provinces. We expect OISHI to achieve a 34.3% EPS CAGR over 2011-14E.
Strong brand with innovative products
Market leader in RTD tea market. OISHI leads the ready-to-drink (RTD) tea market in Thailand with 45% market share. The company’s latest initiative is a cooperation with Serm Suk (SSC TB, Bt165, Not rated) to launch returnable bottle green tea. With this strategy, OISHI aims to penetrate traditional trade restaurants and mom-and-pop stores –a new market for this category. 
Food business leverage on strong brand. OISHI currently has 144 restaurant branches under operation with a 33% market share in the chain Japanese restaurant business in Thailand. It operates seven brands catering to all market segments and leverages on the OISHI brand. We estimate the company will open 30 stores in 2012 and 20 stores pa thereafter, mainly supported by provincial mall expansion. 
Leveraging on urbanization
In an environment of rapidly rising incomes and improving consumer confidence, we anticipate Thai consumers will allocate incremental income to discretionary spending and branded products, on top of daily necessities. With the aggressive expansion of hypermarkets and shopping malls into the provinces, we believe there is a lot of room for Japanese restaurant formats to expand provincially. Moreover, expansion of modern trade retailing in the provinces should promote sales of green tea and packaged food products, which support growth for OISHI. 
Solid balance sheet will enable higher payout
OISHI plans to issue up to Bt3.0bn of debentures to finance its capex plans. This will push the company’s net debt-to-equity ratio to Bt0.7x and net debt-to-EBITDA to 1.3x.
However, given strong cashflow and an improving profitability profile, we expect the balance sheet to de-leverage and OISHI to be able to gradually raise its dividend payout ratio to 60% in 2014E,
from 50% in 2011. We expect a 2014E dividend yield of 3.2%.  
Key risk – reliance on new product launches
OISHI will utilize the one-brand strategy to quickly penetrate the market, but we see risks associated with new product launches. OISHI management has set aggressive revenue targets for the next five years. We estimated that 38% of OISHI’s revenue guidance for 2016 would come from new businesses started in 2012. Given the risks associated with new launches, our revenue projections for 2013-16 are 5-26% below the company’s guidance. However, should the product launches prove successful, there could be upside to our forecasts as well.
Reiterate Outperform and DCF-based TP of Bt240
We roll over OISHI’s target price to end-2013 and derive a new DCF-based target price of Bt240 (representing 27.8x 2013E PER) from Bt195 at end-2012. We value the company using a DCF approach because OISHI’s food and beverage business focuses mostly on basic ready-to-eat food and beverages and mid-end restaurant chains that generate recurring income. We believe OISHI will benefit from Thailand’s growing provincial affluence and aggressive expansion in all its business segments. This growth is supported by the ongoing rapid expansion of all retail formats in the provinces.
Our underlying assumptions: We value the company using a WACC of 9.3%. We assume a 4% risk-free rate, an 8% long-term risk premium, and a beta of 0.9 to value the cost of equity at 11.2%, and cost of debt of 6% (net cost of debt: 4.8%). We assume 2% perpetual growth in our model to reflect the long-term inflation factor. We derive a DCF valuation-based target price of Bt240, which translates into a 2013E PER of 27.8x and a 2013E PEG of 0.8x.