Thai Vegetable Oil

Thai Vegetable Oil Plc (TVO) 

Investment thesis

TVO now looks set to report better 4Q14 earnings than we had earlier modeled, mostly due to a lower SB cost assumption. Furthermore, we expect a fatter GM for FY15, as the global SB price is unlikely to fall any lower from its current level. So, we have upped our FY14 and FY15 earnings projections by 6% and 25% respectively. Therefore, our YE15 target price rises to Bt22.50 (from Bt18.10) and we have upgraded our rating from SELL to HOLD, premised on an expanded expectation for FY15 earnings and a good dividend yield for this year of 7.2%.  

Anticipate 4Q14 core earnings rise, both YoY and QoQ

We now model for a 4Q14 net profit of Bt420m (revised up from Bt331m, due to a lower soybean cost than we had earlier assumed), down 6% YoY but up 65% QoQ. Stripping out extra items—a Bt10m FX gain in 4Q14 and inventory provisioning expenses of Bt45m—core earnings would be Bt455m, up by 11% YoY and 81% QoQ. We now expect revenue for the quarter to post a drop of 13% YoY and 4.5% QoQ, due to lower SBM sales prices. However, reduced soybean costs (which TVO locked in from 3Q14) should outweigh the effect of income slippage for the quarter. Our model indicates a GM surge to 13% in 4Q14 from 8.8% in 4Q13 and 7.4% in 3Q14. 

No signs of recovery in global SB price 

The global soybean price started declining in June 2014 on expectations of a huge US 2014/15 soybean crop—US$9.9/bushel on Feb 16, 2015 (down by 29% from June 30 and by 3% from YE14); the mean price in Feb-to-date was down 3% MoM. According to the USDA’s latest World Agricultural Supply and Demand Estimates report (released on Feb 10), 2014/15 soybean output is still projected to rise YoY in the US, Brazil and Argentina—by 18.2%, 9% and 3.7%, respectively. Global 2015 soybean output is forecast at a record 315m tonnes, up 11% YoY.

But we don’t think the price will fall any deeper, as it is close to the cost of production for farmers (~US$9/bushel). We expect the price to move 

FY15 earnings forecast revised higher, but still not attractive

TVO has launched a new soybean oil brand called Healthy Chef to export to Myanmar (started in late 4Q14). It targets FY15 revenue and profit from the new brand of Bt2bn and Bt50m, respectively (heavy promotional expenses during the initial phase). TVO guides for FY15 top-line growth of 4% and a slightly higher or flattish GM, as it believes that the global SB price won’t fall below than the current low level. We, thus, have revised up our FY15 earnings forecast by 25% to Bt1,752m to factor in higher revenue from the new brand and a fatter GM assumption of 11.7% (we previously assumed 9.3%). However, our forecast upgrade indicates only 4% YoY net profit growth—not worthy of a BUY rating.