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GFPT

Rating upgrade on 2nd half 2012 operational turnaround BUY (upgraded) Target Price: Bt13.50 Price (11/04/12): Bt10.20

GFPT Plc



Investment thesis: GFPT's weak 1H12 earnings outlook—due to plunges in domestic and export chicken prices and a temporary decline in domestic meat consumption—will be followed by a strong bounce in 2H12 and we expect further bottom-line growth in FY13. We believe that the EU's lifting of its ban on Thai raw chicken, effective July 2012, will empower the industry—higher export volumes will mean tighter domestic supplies, so higher domestic chicken prices. We have upgraded our rating from TRADING BUY to BUY, premised on a strong 2H12 earnings bounce.

Net loss for 1Q12: We estimate a Bt50m net loss for 1Q12, against net profits of Bt252m in 1Q11 and Bt219m in 4Q11 (we earlier expected 1Q12 earnings of Bt100m). The operational deterioration is due to lower prices for and domestic sales (down by 27% YoY and 13% QoQ) and exports (down by 8% YoY and 3% QoQ; flattish export sales volume), lower domestic sales volume because of post-flooding consumption shrinkage, a deeper GFN net loss and higher SG&A related to marked-to-market losses on chicken meat inventories.

Price recovery in 2H12: The domestic chicken price will start to rebound in mid May, led by seasonality (the start of the new school year). That rebound will strengthen through 3Q12 and beyond, we expect, with the resumption of raw chicken exports to the EU, which will bring about tighter domestic chicken supplies, so higher local prices (then higher prices for processed chicken exports in 4Q12, probably). We forecast that the mean domestic price will rise to the Bt40-45/kg range in 2H12, against a Bt34/kg mean in 1H12.

5,000 tonnes of additional exports per annum: In light of the EU lifting its ban on Thai raw chicken, effective July 1, 2012, we expect increased chicken export volumes. So, based on the assumptions that GFPT/GFN sells an additional 5,000 tonnes/annum to the EU at a mean sales price of US$3,000/tonne and the domestic chicken price increases from Bt40/kg to Bt45/kg in 2H12-2013, we have upgraded our FY13 net profit forecast by 9% to Bt1.59bn, up 90% YoY.

Outlook

Net loss for 1Q12: We estimate a Bt50m net loss for 1Q12, against net profits of Bt252m in 1Q11 and Bt219m in 4Q11 (we earlier expected 1Q12 earnings of Bt100m). The operational deterioration is due to lower prices for and domestic sales (down by 27% YoY and 13% QoQ) and exports (down by 8% YoY and 3% QoQ; flattish export sales volume), lower domestic sales volume because of post-flooding consumption shrinkage, a deeper GFN net loss and higher SG&A related to marked-to-market losses on chicken meat inventories.

The domestic chicken price fell from Bt40/kg in early Jan to Bt29/kg in early April, its lowest level since Feb 2007, dragged down by oversupply brought about by industrywide capacity expansion in the face of domestic consumption shrinkage. Our estimated GFPT loss for the quarter is due primarily to low domestic sales prices—a Bt35/kg farmgate chicken price against a production cost of Bt35-36/kg (the first-quarter is also low season for exports). The firm's associate (50percent stake), GFN, will probably post a Bt110m net loss, 12% deeper QoQ. We assume GM of only 7% against 16% in 1Q11 and 12.3% in 4Q11. With regard to raw material prices, the corn price rose by 6% YoY and 7% QoQ, while soybean meal price increased by 8% YoY and 6% QoQ.

2Q12 bottom-line to turnaround QoQ: The key drivers of the expected QoQ improvement to black ink will be a seasonal rise in export sales volume and a modest seasonal increase in feed sales (plus the start of the school year in May). But seasonally weak domestic sales in April and early May (there might also be some impact on OPEX due to the minimum wage increase to Bt300/day in April 2012, but many of GFPT's staff are Cambodian, so aren't covered by the new minimum wage rules). In YoY terms, earnings will drop about 70% YoY, due to lower prices for exports—US$3,900/tonne versus $4,500/tonne in 2Q11—and domestic sales—Bt33/kg versus Bt52/kg in 2Q11. Moreover, GFN is expected to post a deeper YoY net loss for the quarter.






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