FRIDAY, March 29, 2024
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Thai Vegetable Oil

Thai Vegetable Oil

Expect 3Q14 core earnings to drop both YoY and QoQ SELL

Thai Vegetable Oil Plc (TVO)

Investment thesis
Although TVO’s weakest quarter for the year is now behind us, we expect the firm to deliver YoY earnings drops for 4Q14-1H15, squeezed by a slimmer GM (the prevailing global soybean price downtrend). A record US soybean (SB) production and huge SB output from South America look set to flip the SB market from deficit to surplus in 2014/15. Our SELL rating stands. 
Anticipate YoY and QoQ core profit decline for 3Q14
We now model for a 3Q14 net profit of Bt265m (revised up from Bt200m), up 21% YoY but down 46% QoQ. Stripping out extra items—a Bt5m FX gain in 3Q14—core profit would be Bt260m, down by 17% YoY and 47% QoQ. The assumed YoY core profit fall was led by a slimmer GM (we estimate 7.7%, down from 7.9% in 3Q13) and a higher SG&A/sales ratio (assumed at 3% against 2.1% in 3Q13). The QoQ dive was due to a slimmer GM (12.2% in 2Q14). 
The global SB price stopped falling, but will decline again in 1H15 
The global soybean price started slipping in June 2014 on expectations of a huge US soybean crop in 2H14—US$9.7/bushel on Oct 24 (down 30% from June 31); the mean price in Oct was down 6% MoM. 
The price should stabilize or rise slightly in 4Q14, due to a relatively slow US soybean harvest (70% is so far completed, below the average for this time of year of 76%) and a delayed soybean planting season in Brazil because of the dryness (about 20% of the typical crop has so far been sown; normally the percentage would be ~35% by this time in the year). However, we expect the price to decline again in 1H15, driven by the harvest South American crops (The Brazilian harvest starts in January, the Argentinean harvest in April).
YoY core earnings drop expected for 4Q14
A sustained or slightly higher global SB price in 4Q14 will make for a better 4Q14 profit in QoQ terms—assumed a fatter GM (a lower SB cost) of 9.5% against 7.7% in 3Q14. But core profit is still forecast down YoY, due mostly to a higher SG&A/sales ratio (assumed at 3.5% against 2.6% in 4Q13) tied to promotional expenses for the SBO business. We have upped our FY14 earnings model by 8% to Bt1.6bn for FY14. Note that our FY15 forecast stands unchanged at Bt1.4bn, down 12% YoY.
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