Thai Vegetable Oil

Thai Vegetable Oil Plc (TVO)

Investment thesis
We are now much more bullish about the 1H14 earnings outlook, so have revised up our FY14 bottom-line forecast by 6% to Bt1.51bn and our YE14 target price by 6% to Bt29.3, pegged to a PER of 15.7x (1SD above TVO’s long-term mean). Given the scope for strong 1H14 profit growth, we believe the share price will rise further. Our TRADING BUY rating stands, premised on a hefty 1H14 earnings profile and an undemanding valuation.
Massive 1Q14 earnings growth expected
Our rejigged model indicates a 1Q14 net profit of Bt533m, up by 713% YoY and 20% QoQ, led by a fatter GM. Stripping out extra items—a Bt55m FX loss in 1Q14—core profit would be Bt588m, a turnaround from a Bt63m core loss in 1Q13 and up 44% QoQ.
The assumed YoY core profit jump was driven by a fatter GM—12.3% in 1Q14 against 1.8% in 1Q13 and 8.8% in 4Q13—due to a lower soybean cost (which TVO has locked in from 4Q13 through to May 2014) and sales price increases. The global soybean market price rose 11% (from US$475/tonne at YE13 to $528/t as of March 31, 2014). Moreover, we expect greater SBO sales volume and sales prices in 1Q14, led by a slimmer SBO price premium over palm oil (Bt12/kg in 1Q14, down from Bt18/kg in 1Q13 and 4Q13).
More bullish on 2Q14 numbers than before
We also have an expanded expectation for 2Q14 earnings, led by a fatter GM assumption (due to the locking-in of soybean costs through May 2014). We now forecast a Bt430m net profit for 2Q14—up 88% YoY but down 19% QoQ. The 2Q14 drivers are higher SBM sales prices (up 5% YoY) and a jump in SBO sales volume (up 32% YoY). Moreover, greater Thai raw chicken exports to Japan, starting May 2014, will boost demand for SBM during 2Q14.
Deeper SB supply deficit expected in 1H14
The recent spike of the global soybean price was due to a deeper supply deficit in the US. The United States Department of Agriculture now forecasts lower SB ending stocks for Sept 2014—it currently expects Sept ending stocks of 3.67m tonnes, down from a 3.95m-tonne projection in March and a 4.09m-tonne forecast in February. The high SB price and margin will support TVO’s 1H14 earnings.
We assume that the SB price will decline in 2H14 with the arrival to market of new US output in Sept. However, there could be scope for upside to our 2H14 profit forecast, depending on the favorability (or otherwise) of weather conditions during the US planting season in May-June and how much the El Nino effect affects growing conditions in major soybean cropping areas.