Bangkok Ranch

Bangkok Ranch Plc (BR) 

 

Investment Thesis

The Danish fairy tale of The Ugly Duckling tells of a little “duck” that is teased by those around him due to his appearance but surprises all when he eventually matures into a swan. We believe our duck stock BR will also have a happy ending and turn into a swan by 2018 at the latest due to its solid long-term core earnings growth profile. Its earnings will start to recover in 1Q16, due to the rise in duck consumption demand after the Chinese New Year festival, and then continue to show mild recovery in 2Q16, before a strong bounce in 2H16. Moreover, scope for upside will come from M&A deals, new market expansion and growth to high-margin business. Its current price is also attractive, trading at only 9.5x for FY16 PER or a 31% discount to chicken base stocks (average PER of CPF and GFPT of 13.7x). Our BUY rating stands.

2015—the ugly duckling is an old story 

The economic slowdown, the decline in other meat prices (such as chicken), and highly volatile currencies caused the drop in export volume and reduced bargaining power BR’s sales prices in 2015. But, this year, all such issues will fade and put BR back on track, we believe. Our preliminary forecast is for a Bt168m core profit in 1Q16, down 10% YoY but up 22% QoQ. We expect earnings to bounce strongly QoQ, as the domestic price war abates, which we believe is a clear sign of even greater earnings recovery in 2016. Also, its earnings in 1Q16 will benefit from a rise in the duck price and sales volume due to the Chinese New Year and the increased substitute products price.

2016—time to join flock of swans

Earnings momentum will rise from this year. We expect sales price and volume from Thailand and Netherlands plant to gain, due to domestic consumption recovery. We maintain our 2016 core profit forecast of Bt640m, a jump of 11% YoY, but our earnings forecast is more conservative than BR’s, which sees earnings to recover to its 2014 base. BR set targets of 5% and 10% YoY revenue growth for Netherlands and Thailand, respectively, against our projection of 5% YoY revenue growth for each in 2016. It expects the duck sales price to rise 3% YoY (price on Makro shelves is currently Bt83, against Bt79 in Dec last year). BR is also talking with other QSR chains (McDonalds); the benefit from QSR is expected to be realized into its P&L by 2H16.

2018—spreads its beautiful wings and takes flight

The company will partner up with a giant conglomerate (40% of shareholding in JV company), which currently has a strong presence in Indonesia. The firm expects to sign a JV agreement within May and start building a slaughterhouse in Aug. The investment budget is expected to be Bt1.2bn (60%-70% budgeting for initial capacity in 2018). The project is scheduled to be up and running in early 2018 with initial production capacity of 5k ducks per day (20k ducks/day of its max capacity). We estimate that this project will start generating revenue of Bt300-400m i 2018—a 3-5% upside from our revenue projection (fully consolidated). Moreover, the new slaughterhouse at Sa Kaeo is going as planned; construction will start in 1H16 and it will COD by 4Q17.