Thaifoods Group

Thaifoods Group

 

Investment Thesis

We believe that TFG’s earnings will bottom out in FY15 before a FY16 turnaround. We recommend skipping past FY15 loss and looking forward to FY16 earnings. We have a strong conviction in its turnaround perspective in FY16, led by recovery of chicken and live-pig prices, its capacity improvement and its cost efficiency program. Moreover, its future plans to capture export opportunities and entering into processed food will lead to brighter outlook. Our BUY rating stands.

Chicken and live-pig prices recovery

With 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 improved domestic chicken meat consumption in FY16, we expect domestic chicken prices to rebound from Bt34-36/kg currently (after the October Vegetarian Festival ends) to Bt42/kg in FY16. We also expect domestic live-pig prices to rebound from Bt66-67 in FY15 to Bt68-70 in FY16, led by the consumption recoveries in Thailand and Vietnam and sustained tightening supply. As of 3Q15, poultry business represented 64% of its total revenue, followed by swine (28%), and feed and other (8%); it has increased the proportion of swine business against 20% of total revenue in 3Q14. We believe that the increase in swine will help it cope with chicken price volatility.  

Key supports for sunny skies ahead

TFG is to add more value to its raw material by creating ready-to-eat products. It plans to set-up its own chicken sausage facility, expected to be completed and operating in 2Q16. Its revenue comes from domestic operations (more than 95%) and from exports to Japan and EU (less than 5%). It aims to raise the proportion of revenue from exports (average 1,100 tons/month in FY15 to 2,400 tons/month at YE16), and is negotiating with partners to establish a JV company as a sales trading firm in the Japanese market to support its export growth. 

FY16 earnings upgraded

We forecast a Bt300m core loss for 4Q15, a reversal from a Bt55m core profit in 4Q14 (led by lower chicken and live pig domestic selling prices), or deeper in the red by 14% QoQ (thanks to low season of livestock business). The lower corn and stable soybean meal prices will be positive factors for 4Q15 but the chicken price has not recovered as much as it should after the October Vegetarian Festival ended, due to the dumping in the domestic market caused by troublesome orders to the EU and the prolonged rainy season.

We upgraded our FY16 earnings estimate by 5% to Bt897m, based on its feed sale volume upgrade as the result of a new feed mill and improvement of its existing mill and ongoing cost reductions through the feed formula adjustment, chicken breeder cost reduction and the reduced benefits given to contracted farmers with their target to reduce chicken production cost to Bt35-36, against Bt37 in FY15. Our YE16 target price increased by 9% to Bt2.4.