Malee Sampran

Malee Sampran Plc (MALEE)

Action and recommendation

Reiterate Outperform with Bt130 fair value. We raise our fair value of MALEE to Bt130/share (from Bt105/share) after rolling over its base year to 2013 and adjusting our earnings forecast. The new fair value reflects a 2013 PER of 12.3x, which is much lower than the average of its regional peers at 24.3x. Given the 36% upside of the current share price to our fair value, we maintain our Outperform rating on MALEE.

Key Investment Points

Expect good 3Q12 result. We expect MALEE to report strong 3Q12 earnings of Bt158mn, up 204% YoY but down a slight 7% QoQ. This impressive result will be driven by a big jump in sales of 79% YoY, thanks to the company’s new strategy of boosting sales across all channels. Although higher labor costs on its production line, due to the minimum-wage hike in 2Q12, will continue to pressure GPM, economies-of-scale benefits at the SG&A level should offset the negative impact. This expectation is confirmed by the strong pickup in MALEE’s 1H12 earnings, which rose 400% HoH. However, an earnings slowdown on a QoQ basis is likely due to seasonal factors, as 3Q is the low season for beverage consumption compared to 2Q (summer).

New capacity is a key growth driver. MALEE is in the process of expanding its production capacity (since 3Q12) by about 50% to 290 mn litres/year after its current capacity has run at its maximum since 2Q12. As a new facility is set to be completed in 4Q12 and the company has secured a number of new orders for next year, we expect MALEE’s 2013 revenue will grow nicely by 15% YoY.

Earnings revision. We revise up our 2012 earnings forecast by 9% due to a solid sales strategy that has allowed MALEE to maintain its 2H12 sales revenue at a high level as we saw in 1H12. However, we maintain our earnings projection for 2013 and trim our earnings forecast for 2014 by 4% due to a more conservative view on revenue caused by the risk from MALEE’s high dependence on OEM clients (30% of total sales). Although GPM has come under pressure from the minimum-wage hike, economies of scale at the SG&A level should ensure its NPM is maintained at a healthy 10%. Based on our new projections, MALEE’s earnings will grow nicely by 202%, 8% and 14% in 2012-2014, respectively.
 

Solid balance sheet. MALEE has a solid balance sheet with an interest-bearing-debt-to-equity ratio of just 0.12x in 2Q12 (no long-term loans from financial institutions or debentures). We attribute this great status to its strong working capital management (it has had a deficit cash cycle day since 2009). This means MALEE can hold cash for longer while effectively borrowing money from suppliers without having to pay interest. We believe the company will be able to continue to do this and that its interest-bearing-debt-to-equity ratio should fall to 0.05x in 2014.

Estimate DPS of Bt4.9/share from 2012 performance. We expect MALEE to begin paying a dividend in 2013 (from its 2012 performance) after its retained earnings turned positive in 2Q12. Moreover, its balance sheet status and cash flow are solid. Based on a payout ratio of 50%, we expect a dividend per share of Bt4.9, equivalent to a yield of 5.1%.
Price catalyst

Good 4Q12 result
Strong 3Q12 earnings performance expected

We expect MALEE to report good 3Q12 earnings of Bt158mn, up 204% YoY but down a slight 7% QoQ.
Its new strategy of utilizing production capacity for a wider variety of products both for OEM customers and its own production as well as a number of secured orders from its clients should ensure sales in 3Q12 remain at the same high level as in 1H12, boosting 3Q12 revenue by 79% YoY. Moreover, its strategy to stabilize canned fruit sales across all quarters of the year despite the production season in 2Q-3Q should help smooth quarterly sales revenue. The strong pickup in 1H12 earnings, which rose 400% HoH, confirms this strategy is working. This factor, combined with the economies of scale at the SG&A level, suggest MALEE’s net profit margin (NPM) should improve dramatically from 6.1% in 3Q11 to 10.4% in 3Q12, making its earnings growth on a YoY basis even faster than the high level of growth seen in sales revenue.
However, on a QoQ basis, we see a small decline in earnings. A slowdown in sales revenue of 7% due to the low season for beverages in 3Q against high season in 2Q (summer) should be the major reason for the earnings drop. 3Q12 gross profit margin (GPM) should be flat from a low level in 2Q12 due to the impact from the minimum wage hike, which took effect in Apr 12. Meanwhile, we see no major change on SG&A and interest expense. 3Q12 NPM should thus stand at the same level as 2Q12 (about 10.4%). This leads us to believe that its net profit will fall at almost the same rate as sales revenue.

Net profit to grow 202%, 8% and 14% in 2012-2014 2012-2014 earnings revision
We revise up our 2012 earnings forecast by 9% after raising our 2012 revenue forecast by 4% to reflect the effectiveness of the new sales strategy, which should maintain revenue in 2H12 at the same high level as in 1H12 (up 95% HoH). 2012 sales revenue should thus increase by 72% YoY. However, we maintain our earnings forecast for 2013 and revise down our earnings estimate for 2014 by 4% in order to take a more conservative view of MALEE’s growth prospects. A 30% sales portion from OEM clients is the key risk factor. Sales will fall strongly if the company loses some of its OEM clients. However, our new forecast sees solid sales revenue growth of 72%, 15% and 10% and earnings growth of 202%, 8% and 14% in 2012-14, respectively. Despite a nice improvement, it is still far below MALEE’s revenue growth target of nearly 20% during 2013-15. In our view, MALEE’s current 2015 revenue target of Bt10bn, nearly triple the Bt3,660mn it reported in 2011, is too aggressive. Not only will both its current and new facilities need to run at full capacity, but the company would have to raise its selling prices by 3-4% p.a. on average to achieve the target, which is not easy during a period of aggressive sales expansion.
10% net margin is achievable Despite revising down our GPM estimate due to the minimum-wage hike, we believe MALEE’s NPM can remain at an attractive level of 10%. We believe its strong internal cost management will result in SG&A to sales declining sharply from our previous forecast as well. This should be enough to offset the negative impact of the erosion in GPM. These expectations are supported by the 1H12 actual performance described earlier. Note that MALEE’s GPM target is 30% while our current forecast ranges between 26-27%. We thus see larger upside potential to our current forecast if MALEE can implement a better cost control program than our estimate.

Much cheaper than peers
MALEE is now trading at 13.2x PER and 7.6x PBV in 2013E. If we compare MALEE to its regional peers (companies that produce fruit juices or canned fruit in Asia-Pacific), we find that the Thai stock is much cheaper. The average PER and PBV of regional companies in the same period are 24.3x and 8.7x, respectively. We believe MALEE’s current discounted valuation compared with its peers is due to the fact that it gets 30% of its revenue from OEM clients, which carry a higher risk than own brands. However, we think there is more upside for MALEE to trade higher than these levels of PER and PBV (our Bt130 fair value implies 12.3x PER and 5.6x PBV) should it be able to demonstrate that its OEM clients are repeat customers and sustainable. Moreover, our expectation of a 5.1% dividend yield for MALEE in 2013E (from 2012E) is much higher than the average of its peers of only 2.0%.