Thai Vegetable Oil

Investment thesis

Excellent 1H14 bottom-lines are now behind us. TVO will deliver earnings slippage through 2H14, due to slimmer GM. Expectations of the market arrival of a record US soybean harvest in Sept (marketing year 2014/15) have started to squeeze global soybean (SB) prices. Given that global SB prices are entering a downtrend and a poor 2H14 profit outlook, we have cut our rating from TRADING BUY to SELL and our YE14 target price to Bt18.3 pegged to a de-rated PER of 10.1x.

Anticipate YoY and QoQ core profit decline for 2Q14

We now expect a 2Q14 net profit of Bt475m (revised up from Bt430m), up 108% YoY but down 8% QoQ. Stripping out extra items—a Bt20m FX loss in 2Q14—core profit would be Bt495m, down by 4% YoY and 14% QoQ. The assumed YoY core profit drop was led by a higher SG&A/sales ratio (assumed at 3.4% against 2.4% in 2Q13), due to promotional expenses for the soybean oil business. The expected QoQ core profit fall was due a slimmer GM (a higher SB cost in June)—11.5% against 13.1% in 1Q14).

Soybean price has started to drop earlier than we expected

The global SB market price at end-July fell 13% from end-June (from US$14/bushel to $12.2/bushel). Expectations of a huge US soybean crop have started to squeeze global SB (and SBM) prices earlier than we had previously anticipated (we had assumed Sept). The SB price fall was due to a greater planted area in the US—84.8m acres; the USDA had previously estimated 81.5m acres for 2014/15 (against 76.5 in 2013/14). Also, the USDA expects a record SB yield of 45.2bu/acre (the previous record was 44.5bu/acre in 2009) against 43.3bu/acre in 2013/14. US SB ending stocks are now projected at 11.3m tonnes (3.8m tonnes for 2013/14), which would be the highest since 2006/07.

There would be downside risk to SB prices if the El Nino effect were to manifest this year. El Nino causes heavier rainfalls in South America, which would boost soybean yields in Brazil and Argentina (major global exporters). Note that Brazil’s soybean-planting season is Sept-Dec, but Argentina’s planting season is Oct-Jan.

Earnings dive expected in 2H14

We have revised down our 2H14 earnings forecast 16%, due to a slimmer GM assumption—we expect higher SB cost and a lower SBM sales price. Our 3Q14 projection is a Bt200m core profit, down by 36% YoY and 60% QoQ. GM is expected to drop to 7% from 7.9% in 3Q13 and 11.5% in 2Q14. The average domestic SBM sales price dropped to Bt19-20/kg in July from Bt20-21.5/kg in June. We have cut our earnings forecasts by 3% to Bt1.46bn for FY14 and by 4.5% to Bt1.48bn for FY15.