Food

High swine prices, low feed costs, and the revival of the shrimp business have been fuelling sector earnings in 2016TD. It is now seeing an additional short-term catalyst in an improvement in the broiler business over the past two months. Our top picks are CPF and GFPT.

Livestock industry. In 3Q16TD, broiler and swine spreads have widened 9% YoY and 2% YoY, respectively, backed by better product prices as supply adjusts and feed costs drop. Broiler price rose to Bt38/kg (+2% YoY), while swine price was stable at 70/kg (flat YoY). On the feed cost side, corn costs fell to Bt9/kg (-11% YoY) and soybean costs rose to Bt18/kg (+8% YoY).

Broiler business (CPF and GFPT). The jump in day-old-chick price from Bt12 in 7M16 to Bt17 in August (+40% YoY) and Bt19 (+50% YoY) in early September are leading indicators that tighter supply will continue. Behind this was: 1) supply damage from weather, i.e. heavy rain and floods; 2) a shortage of breeders after the US was hit by bird flu; 3) stronger demand from Japan, where there is rising demand for high-quality Thai products due to safety concerns. As it takes time to bring supply can come back up, companies expect the tighter situation to last for the next 3-6 months, which implies that better broiler prices in 2H16 than in 1H16.

Swine business (CPF). While rainy season softened swine price slightly, price will continue stay high at least until the end of 2016 because of tighter supply in China and regional markets.

Feed costs (CPF and GFPT). Companies are not concerned about feed cost since climate conditions are pointing to good harvests, which will keep feed costs low in 2H16-2017F. They are locking raw material costs 3-4 months in advance.

Aquatic industry. Shrimp (CPF and TU): In 3Q16TD, shrimp price has picked up to Bt178/kg, +13% YoY. Diseases (EHP and white feces) in India and Vietnam have cut back on shrimp production; in China, farmers that lost shrimp harvests to EMS have not returned to shrimp farming. Better prices and a higher shrimp survival rate using new technology for shrimp farming to prevent EMS should lift Thai shrimp production to 300K tons (+15% YoY) in 2016.

Tuna (TU): In 3Q16TD, tuna price became more stable at US$1,425/ton (flat YoY and -5% QoQ), thus having little impact on tuna margin and volume. Salmon (TU): Price jumped by more than 40% YoY in 1H16 as algae bloom affected salmon production in Chile (the world’s second biggest producer). In 3Q16TD, though salmon price has declined some from the peak in July as global supply rose, it is still high compared to last year (+40% YoY). As for TU, the rapid rise in raw material cost and price commitments under long-term OEM contracts means it had to book a net loss in the chilled salmon business of Bt370mn in 1H16 (15% of earnings). TU has been negotiating re-pricing of contracts since mid-2016 and hopes this will cut the losses enough that it may break even in this business unit in 2H16.

Top picks: CPF and GFPT. Sector earnings are better in 3Q16 from a combination of high season, better livestock business (improvement in broiler and swine units), and improving aquatic business (led by shrimp). We like CPF most in its sector, as it is positioned to be the best in 3Q16 (up YoY and QoQ, with better livestock and aquatic units) and may again be the leader in 4Q16 (up YoY on better livestock and aquatic units, but down QoQ on seasonal factors). We also like GFPT, which will have a strong 3Q16 on better livestock unit and solid equity income.