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Monday, June 13, 2011
Sunday, June 5, 2011
AGRI & Food: Looking for a new sweetheart? Try KSL – Neutral
1Q11 results review:
Results of Agri & Food sector are mixed. Meat producers like CPF and GFPT reported normalized earnings that improved 224% and 15.3%, respectively, from the previous quarter due to higher meat prices. (see Fig.3) Meanwhile, TVO reported a 48.6% QoQ decline in earnings mainly due to slow moving soybean meal volume. STA’s earnings jumped 78.6% QoQ following skyrocketing rubber prices.
Recent developments:
Domestic meat prices remained on the uptrend in Apr-May. QTD broiler and swine prices went up 10% and 17%, respectively, from 1Q11. The sustained level of high prices coupled with rising demand (both domestic and export) should cause earnings momentum to peak in 3Q11.
For soft commodities, prices have been volatile but remained at high levels in a historical context. The La Nina phenomenon has faded, but it left huge damage from its final goodbye kiss, with an overflowing Mississippi River and a tornado in Missouri . The planting progress of key crops has been slower than the historical average this year. Elsewhere, China has experienced a persistent drought along the Yangtze River , which is likely to damage crops in the area.
Our view:
CPF and GFPT remain relatively low risk/low return bets supported by high domestic meat prices. We prefer GFPT (TP Bt14) due to its focus on the broiler chain. Day old chick prices are still rising, suggesting a tight demand/supply balance.
KSL (TP Bt17) is our top pick. We are convinced that KSL will report its 2QFY11 (Feb-Apr) during mid June with earnings that jump 165% to Bt400m and go higher in 3QFY11. Key investment ideas are: 1) KSL starts realizing a high margin of this year’s crop in 2Q, 2) lower drag from Laos and Cambodia after crushing first crop, 3) higher-than-expected Thai sugar cane (90m tons vs. first estimate of 70m tons), resulting in extra sugar volume for sugar millers, 4) world raw sugar prices rebounding to 23cents/lb. from a 20.5cent/lb. low. This implies lower risk to next year’s pricing.
Results of Agri & Food sector are mixed. Meat producers like CPF and GFPT reported normalized earnings that improved 224% and 15.3%, respectively, from the previous quarter due to higher meat prices. (see Fig.3) Meanwhile, TVO reported a 48.6% QoQ decline in earnings mainly due to slow moving soybean meal volume. STA’s earnings jumped 78.6% QoQ following skyrocketing rubber prices.
Recent developments:
Domestic meat prices remained on the uptrend in Apr-May. QTD broiler and swine prices went up 10% and 17%, respectively, from 1Q11. The sustained level of high prices coupled with rising demand (both domestic and export) should cause earnings momentum to peak in 3Q11.
For soft commodities, prices have been volatile but remained at high levels in a historical context. The La Nina phenomenon has faded, but it left huge damage from its final goodbye kiss, with an overflowing Mississippi River and a tornado in Missouri . The planting progress of key crops has been slower than the historical average this year. Elsewhere, China has experienced a persistent drought along the Yangtze River , which is likely to damage crops in the area.
Our view:
CPF and GFPT remain relatively low risk/low return bets supported by high domestic meat prices. We prefer GFPT (TP Bt14) due to its focus on the broiler chain. Day old chick prices are still rising, suggesting a tight demand/supply balance.
KSL (TP Bt17) is our top pick. We are convinced that KSL will report its 2QFY11 (Feb-Apr) during mid June with earnings that jump 165% to Bt400m and go higher in 3QFY11. Key investment ideas are: 1) KSL starts realizing a high margin of this year’s crop in 2Q, 2) lower drag from Laos and Cambodia after crushing first crop, 3) higher-than-expected Thai sugar cane (90m tons vs. first estimate of 70m tons), resulting in extra sugar volume for sugar millers, 4) world raw sugar prices rebounding to 23cents/lb. from a 20.5cent/lb. low. This implies lower risk to next year’s pricing.
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