Srithai Superware

Srithai Superware Plc (SITHAI)

Investment thesis
Although SITHAI’s share price has dropped 18% since our earnings forecast downgrade on Feb 21, we expect it to fall further in the short-term. Demand for melamine products has been subdued—the impact of baht appreciation appears to have been greater than we assumed. As such, we maintain our short-term negative view toward the stock. We have also slashed our 1Q13 earnings estimate by 28% and our FY13 forecast by 6% and arrived at a new YE13 target price of Bt31. Assuming that 1Q13 results fall short of the consensus, there is likely to be further price slippage, which would present an opportunity to buy.
Q1 2013 estimate revisited; FY13 forecast also trimmed
We are now more subdued about the 1Q13 earnings outlook, due to diminished expectations for the top-line and margin. Our revenue growth assumption falls to 21% YoY from 27%. We have also cut our GM assumption by 160 bps to 20% on a slimmer melamine margin expectation coupled with a lower proportion of melamine products in the sales mix. As such, our 1Q13 earnings estimate is Bt103m, down by 13% YoY and 35% QoQ. We have also revised down our FY13 profit forecast by 6% to Bt574m, as we have cut our GM assumption to 21.5% from 22.2%.
Melamine margin the key dampener
Melamine sales are likely to be posted flat YoY for 1Q13. Note that the Farm Income Index has contracted in YoY terms for three consecutive months. The implication is that a substantial proportion of SITHAI’s melamine product customer base is spending less. Melamine export volume should post a YoY rise, but baht appreciation of about 3% will have squeezed margin. As such, our 1Q13 melamine GM assumption has dived 480 bps to 28.2%. 
Seasonal plastic demand—key earnings booster in 2Q12
We expect SITHAI’s earnings to increase by 12% YoY and 31% QoQ in 2Q13, boosted by baht depreciation and the plastic business. The Vietnam operation has improved significantly with a lower defect rate. The screw cap production line run now has a run rate of 80-85% and the PET preform line a run rate of 70%. Management expects the utilization rate of beverage packaging to increase in tandem with high season (hot season) for the beverage business.
2nd half 2013 profit to rise HoH
Normally second-half earnings rise HoH. We expect SITHAI to post profits of Bt155m for 3Q13 (up by 15% QoQ and 6% YoY) and Bt182m for 4Q13 (up by 15% QoQ and 16% YoY). SITHAI customers are likely to order more beverage packaging during 2H13, due to beverage industry expansion. Moreover, 4Q13 is high season for melamine sales.