Another bumper year for soybean firm

A whole collection of market factors seems to be enhancing the prospects for Thailand's largest soybean-based animal-feed manufacturer and soybean-oil producer, Thai Vegetable Oil (TVO).

There is strong demand for biofuel in the wake of skyrocketing oil prices, stocks of soybeans are currently tight, there is the possibility of an increase of Bt8.50 a litre in the domestic retail price of soybean oil and floods have hit the soybean-producing areas of the US. All of this suggests soybean prices will remain high.

In a consensus from a survey on TVO shares conducted by the Securities Analysts Association last month and early this month, seven brokers are recommending "buy", with target prices ranging from Bt26.85 to Bt38.90, while one broker recommends "hold".

TVO has a daily production capacity of 4,000 tonnes and is planning to build a new plant that will lift its daily capacity to 6,000 tonnes when it begins operations in 2010.

TVO supplies 28 per cent of the soybean meal consumed in Thailand. It has its own A-ngoon brand of soybean cooking oil, which commands half of the domestic market, and a soybean-meal and rapeseed-oil plant in China, which contributes 15-17 per cent of the company's sales revenue.

First-quarter sales amounted to Bt5.86 billion for a net profit of Bt584.55 million. Soybean meal contributes 61 per cent of sales revenue, soybean oil generates 38 per cent, and other products make up the rest. Eighty-three per cent of last year's revenue came from the domestic market, with 2 per cent from exports and 15 per cent from China.

TVO's main risks are a drop in prices of soybean and its derivative products, postponement of expansion plans, a change in the oil-price outlook affecting biofuel demand and foreign exchange.

Tisco Securities, which was not included in the Securities Analysts Association consensus, has upgraded its recommendation for TVO shares from "hold" to "buy" and raised its 12-month pre-excluding right-to-receive-warrant (XW) target price to Bt31.75 apiece and post-XW to Bt28.40.

Ending inventories, or existing stocks and demand for major crops, especially corn and soybean, are likely to reach critical levels, and the broker sees no easy way to resolve the "food or fuel" dilemma.

TVO's sales volume rose quarter on quarter in the second quarter, because of higher demand for soybean meal resulting from growing exports of chicken to Japan and the EU. The broker expects second-quarter revenue to jump at an annual rate of 50.2 per cent to Bt6.1 billion. Based on an assumption of a 16-per-cent gross margin, TVO is expected to see a whopping rise of 133 per cent year on year in its quarterly net profit before extra items, to Bt585 million.

Tisco Securities has also revised upwards by 20.3 per cent its profit forecasts for TVO for this year and next, to Bt2.34 billion and Bt2.38 billion, respectively, and by 26.3 per cent for 2010 to Bt2.92 billion, assuming a 6.2-per-cent rise in the price of soybean oil.

The US Agriculture Department reported at the end of last month that land available for key crops was slightly lower as a result of flooding in the Midwest earlier in the month. The estimated area of soybeans planted this year is 30.15 million hectares, up 17 per cent year on year but less than the intended 18 per cent. Phillip Securities, one of the brokers in the association's consensus, recommends "buy" for TVO shares, with a 12-month target price of Bt31.50 apiece.

"In our view, 2008 is shaping up to be another good year for TVO, as selling prices remain on an upward trend. Flooding in the US, the world's biggest maize and soybean producer, should continue to push selling prices even higher," the broker said.

It expects TVO to achieve sales revenue of Bt21.73 billion this year, up 19 per cent year on year. It has revised this year's earnings estimate for TVO to Bt1.78 billion, up 42 per cent year on year.

Soaring raw-materials prices and bottling costs have prompted soybean-oil producers to call on the Commerce Ministry to permit a domestic retail-price increase of Bt8.50 per litre bottle of soybean cooking oil. The price is now Bt47.50 a bottle.

With sustained rises in raw-material costs for production of both palm and soybean oil, the Commerce Ministry will eventually allow producers to raise their selling prices, which will drive earnings above expectations, the broker said.

TVO's plan to issue 184.9 million capital-increase shares to finance its new plant will cause an 8-per-cent earnings-per-share dilution this year.

The broker predicts TVO will pay an annual dividend of Bt1.85 a share for this year's earnings, representing a yield of roughly 7 per cent per year.

Asia Plus Securities, another broker included in the association's consensus, recommends "buy" for TVO shares, with a post-XW fair value of Bt26.93 apiece.

The broker said soybean demand and new supply in the 2008-09 planting season would probably remain tight from the US flooding and that this would keep soybean-product prices relatively high.

In the first half of the year, domestic soybean-meal prices rose more than 16 per cent to Bt19.20 a kilogram, driven mainly by rising demand for biofuel.

Asia Plus Securities said it might revise upwards its gross margin estimate for TVO after the soybean manufacturer announces its second-quarter earnings.

Meanwhile, it is still using a gross margin estimate of 14.9 per cent, well below the first quarter's figure of 17.6 per cent.

"Additionally, it may be possible [for TVO] to raise its soybean-oil price in 2008 more than Bt8 a litre, and [if this happens] the selling price will be higher than the broker's estimate," it said.