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Rock Street, San Francisco

-161671031115Date
9 November 2017
00Date
9 November 2017
Ticker: GFPT Recommendation: BUY
Price: THB 17.50 Price Target: THB 21.00
Earnings/Share Mar. Jun. Sept. Dec. Year P/E Ratio
2014A THB0.34 THB0.38 THB0.40 THB0.29 THB1.41 11.91x
2015A 0.17 0.16 0.26 0.36 0.95 11.15
2016A 0.22 0.30 0.40 0.39 1.31 11.51
2017E 0.34 0.39 0.41 0.28 1.42 12.16
Highlights
A cyclical stock with strong potential growth
-2032007239000Fundamentals and valuation are indicative of a BUY recommendation: With te target price at THB 21.00 at the end of Y2017, there is an approximately 20% upside gain. As GFPT’s business is based on commodity products; therefore, GFPT has low bargaining power of both suppliers and customers. Coupled with the advantage of being a fully vertical integration of chicken business, threat of new entrants is low.

Positive outlook for chicken demand consumption: The demand for chicken meat consumption has been increase from time to time in both domestic and international market, especially in Japan market. The underlying reasons for this raising are that the price for chicken meat is rather cheaper than other meats and the nutrition of chicken meat is preferred by health-conscious consumers rather than other meats. As a result, the revenue compound annual growth rate from Y2007 to Y2016 is 9% per annum, allowing GFPT to rank No.6 in Thai chicken production and No.3 in Thai chicken export.

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Operational excellence from being a fully vertical integration: GFPT is a fully integrated poultry business which covers feed mill, grandparent chicken farm, parent chicken farm, broiler farm, chicken evisceration and processed food production. It continues to reducing production cost by expanding backward integration to improve cost efficiency, utilizing modern machinery to increase production efficiency, improving feed formula that contains high nutrition, developing chicken farming system to prevent outside germs, and implementing a traceability system in order to track and monitor the quality throughout the production process. With this integration, GFPT is enable to exploit the advantage of cost and quality control throughout the production process.
4073829579374000111125162560043046651145540GFPT Public Company Limited
00GFPT Public Company Limited

Business Description
Company Overview
GFPT Public Company Limited (“GFPT”) was incorporated on 25 November 1981 and listed in Thailand Stock Exchange (“SET”) on 27 March 1992 with a quoted symbol of “GFPT.” Currently, GFPT has registered capital of 1.4 billion Baht and already paid-up of 1.25 billion Baht.
GFPT is one of the Thailand chicken processors and marketers which provides products and services to customers both domestic and international markets. With the aim to be a leading chicken meat exporter with its fully vertical integrated chicken production, it acts as a parent holding company of the group which operates a fully vertical integrated chicken production which includes feed mill, breeder farm, hatchery farm, broiler farm, chicken evisceration and processed food. Its main products of the group are cooked chicken products, fresh and frozen chicken meat, processed food, land animal feed, and aquatic animal feed.

Revenue Structure
In 2016, the revenue of the company and its subsidiaries consisted of 43.19% from evisceration and processed chicken business, 23.41% from feed mill business, 29.03% from chicken farms and day-old chicken’s distribution business and 5.37% from processed foods business.
Figure xx

Source: Company Form 56-1
Food Segment
Food segment is the largest portion of GFPT’s consolidated sales, represented 48.56% of total sales in Y2016. The revenue from this segment consisted of revenue from chicken evisceration and processed chicken at 43.19% of total sales and revenue from processed foods at 5.37% of total sales.
Chicken evisceration and processed chicken’s main products are fresh frozen chicken parts, cooked chicken products and chicken by-products. Under this sub-segment, 50.45% of total sales comes from (1) revenue from selling chicken meats to its subsidiaries for export, indirect export, at 43.36% of total domestic sales, (2) revenue from selling export quality products to local processed foods manufacturers for export, indirect export, at 8.45% of total domestic sales, and (3) revenue from selling chicken by-products to local wholesalers and retailers at 48.19% of total domestic sales. The remaining of 49.55% of total sales comes from direct export.

Chicken processed foods are being operated solely under GF Foods Company Limited (“GFF”), a subsidiary of GFPT. Its main products are sausages, chicken nuggets, and other products under GF Foods. Under this sub-segment, GFF sells solely to fresh market customers and provincial customers, local middlemen.

Farm Segment
Farm segment is the second largest portion of GFPT’s consolidated sales, represented at 29.03% of total sales in Y2016. The main products from this segment are (1) day-old-chick which are operated by GP Breeding Company Limited (“GP”) and Krungthai Farm Company Limited (“FKT”) and (2) live broiler which are operated by M.K.S. Farm Company Limied (“MKS”). All revenue in this segment come from inter-company transactions, especially revenue from selling live broilers to GFPT Nichirei (Thailand) Company Limited (“GFN”), a joint-venture company. Since GFN has started its operation in 2010, the revenue from farm segment has been increasing continuously.
Feed Segment
Feed segment represented 23.41% of consolidated sales in Y2016. Main products are animal feed, shrimp feed, and fish feed. 65% of total revenue in this segment comes from selling of chicken feed to its subsidiaries and 35% of total revenue in this segment comes from selling of non-chicken feed to local animal raisers both land ; aquatic animals.

Domestic Market
GFPT’s domestic revenue represented 77% of total revenue. The company maintain its position as one of the leading broiler company in Thailand. Domestic consumption was the main supporting of GFPT’s business achievement.

International Market
In 2016, growth in export volume strongly support the consolidated revenue from sales. International revenue represented 23% of total revenue. The company has expected growth of chicken meat in export market will continue to rise as the import ban has been lifted in several countries and the ongoing low feed costs.

Business Strategy
Striving to be a leading chicken meat exporter with its fully vertical integrated chicken production and agriculture, GFPT has committed to enhance product quality to meet international standards of EN regulations on food safety and animal welfare. The company also emphasizes on the food safety by selecting the finest raw materials and placing strictly control in all production processes to ensure that products are valued by both domestic and international customers and trying to achieve the traceability system.

Throughout the years, the company the company has significantly expanded its business vertically as well as expanded the production capacity in order to meet the excess demand in both domestic and international market.

Nowadays, GFPT is the parent company of the group who operates chicken production and distribution of frozen chicken meat, processed chicken, and its by-products under the customers’ and company brand names for both domestic and overseas markets. In 2016, GFPT has chicken processing capacity of 122,000 tons per year and cooked chicken products capacity of 32,000 tons per year from the plant located at Samutprakarn.

Resulting from the successful visionary management, GFPT’s financial performance has been continuously developed as indicated by looking at EPS, ROA, ROE and Ner Profit Margin as per below table.

Table * The Financial performance of the company

Source: The Stock Exchange of Thailand

Corporate Governance
Shareholding Structure
GFPT is being held majority by Sirimongkolkasem family at 55.22% where 5.38% of total shares have significant influences on the business decision. The minor shareholders or free float is accounted for 44.88%.

Governance
According to the Thai Insitue of Director (“IOD”), GFPT CG score has been improved from a ‘Good’ level during 2006 – 2015 to a ‘Excellent’ level in 2016 which is the highest level. GFPT also achieves the Top Quartile Award for being the first 25% highest CG score among listed companies with market capital more than 10 billion Baht.
Board Control
Even though there are 3 independent directors in the board members, the chairman and the managing director are from Sirimongkolkasem family. In addition, most of members in board of directors and executive committee are denominated by Sirimongkolkasem family.

Good Corporate Governance Policy
To ensure a good corporate governance, GFPT has been implementing the Good Corporate Governance Policy throughout the organization and review on the annually basis. This policy covers various aspects as specified under SET such as Rights of Shareholders, Equitable Treatment for All Shareholders, Interests of Other Stakeholders, Disclusure and Transparency, Structure of the Board.

Qualified Auditor
Sam Nak-Ngan A.M.C. Company Limited has been appointed as the company’s auditor for year 2016. This audit firm is qualified and approved by the office of the Securities and Exchange Commission (“SEC”).

Industry Overview and Competitive Positioning
Macro-Economic Analysis: Macro Conditions Support Strong growth
-516255448719000
World Economic Outlook is strengthen.

Global economic outlook continues to expand as expected from major economies driven by accelerated growth from the United State. An analyst expects the global real GDP growth will grow at a rate of 3.5% (0.7% inflation) compared to 3.1% in 2016.
The United States’ GDP growth is forecasted to increase by 2.1% (2.1% inflation) in 2017, slightly better than the 1.6% (2.2% inflation) growth in 2016. The economy is healthy, exports continue to expand and support industrial output while private consumption recovered even more. China’s economy is going strong in both industrial and service sectors. However export growth has slow down partly due to the strong CNY against USD. The GDP’s growth forecast at +6.6% (4.8% inlation) in 2017, slow down from last year at +6.7%.
The overall picture of the Japanese economy during the first four months of the year is still showing signs of relatively weak expansion. Although the export sector has improve but consumption in the country and production slowed down. Also a lack of wage growth in the economy lead to labor shortages problem and likely to cause deflation. Though the economic direction is in good direction.

-520227621601500
Growth in population and consumption of poultry.

The increase in global population has led to a sharp increase in the demand of meat, especially chicken meat. This is because chicken meat is cheaper and has lower fat content.. In the year 2012-2016, there was an upward trend for the world chicken consumption approximately at 1.86% annually. In 2016, world chicken consumption was 87.38 million tons, up from 86.96 million tons in 2015. The United States is the country with the highest consumption of chicken meat is consuming at 15.23 million tons, followed by China at 12.99 million tons and EU at 10.38 million tons.

Over the past century, the size of the Thai population has continuously increased. In 2010, there were 66.7 million people in the country. This number has jumped to 68.1 million people in 2016. Thai population has been growing approximately around 0.2-0.4% annually for the 10 years. The growth rate is expected to continuously increase at 0.1-0.2% in the next five years and the rate may be even higher thereafter. With the growing population, the domestic consumption for poultry will surely upsurge and this will increase the demand for the industry.

-610870447380Considering the increasing trends in Thailand’s population, the poultry consumption is expected to increase as well. The margin outlook for the global poultry industry is gradually improving after challenging conditions in the past. The main factors that are driving the recovery are increasing in demand, lower supply growth in key regions like USA, China, Thailand and Europe, and price support from recovering red meat markets. Globally, the market reports agree that the chicken production industry is remaining strong. Although, the overall trade between countries dropped by 5% annually, the tight supply of the production can support the industry greatly.

Political stability help support stable growth in Thai economy
-60642517338900In 2014, the Thai army seized control over politics and this causes the Thai economy to grow steadily. According to the research, the earliest possible election date could be held in 2019. As a result, Thailand can expect a political stability in the coming years, which could help to support the growth of the economy. As shown in the Q1 of 2017, the GDP growth is sustained at 3.3%. Although the GDP growth rate may grow insignificantly and fluctuated over the past 5 years. Domestic demand for chicken products is still expected to rise as chicken meat is cheaper than the other forms of meat and is considered as a good choice for consumers who prefer rich-nutrient diet.

Volatility of oil price will effect production cost
For decades, the global oil market has been volatile as suppliers could control supply and demand. Such a supplier could rise production when demand for oil is high and limit output when the market is saturated. The swings in the price of oil, both up and down, can cause an effects on companies, economies, and global
situation. The spikes oil price can slow down economic growth and currently the oil market is unstable which is particularly challenging, for companies that rely on the price of oil. This is another obstacle and risk that may affect the production, the rising of oil price may lead to higher cost of raw feed materials so it’d has a direct effect on the cost of broiler
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Industry Analysis:
Main producers of frozen and processed chicken in the world
In the year 2016, the world’s quantity of broiler chicken production was around 98 million tons, growing at the rate of -0.03% from the year 2015. However, the global production is forecasted to grow at 1.2% in the year 2017-2018 to 99 million tons. The growth is mainly support by the United States, Brazil, China, and the European Union. The combined output of the four major countries has accounted over 60% of the total global production. The United States was the largest producer, producing at 20 million tons, followed by Brazil at 15 million tons, and China at 12 million tons.

Thailand’s production of frozen and processed chicken ranked 9th in the global market at 2.1 million tons and this accounted for 5% of the total global production. Despite the overall global market dropped of -0.03%, Thailand’s production increased in 2015 by 4.71% and is forecasted to increase by 6.7% to 2.2million ton at the end of 2017 in response to the potential growth in the export (58% of the total consumption) and the domestic demand (42%of the total consumption).

Lifted of import ban of on Thai frozen chicken meat
-553085656987200The Avian flu problem back in 2004 that hit the poultry industries in Asian countries including Thailand impacted the export greatly. This incident had impacted over two million people in Thailand who were dependent on the poultry sectors. Thai frozen chicken and processed chicken industry was adversely hit by a ban on imports from major trading partners such as the EU, Japan, South Korea, Russia, Hong Kong, and South Africa.
After the hit of the flu, Thailand began to adopt a system called an evaporative air-cooling system, which helps to contain the spread of the infectious disease by reducing the exposure of animals to diseases. Thailand has improved farming facilities and bio-security to ensure food safety and healthy animals. There has been no serious animal disease incidence for the Thai broiler industry in the recent years. After several years, the import ban was revoked and Thai products are accepted again with confidence in terms of quality and price. Countries continue to lift import ban on Thai frozen chicken meat after the EU lifted its ban on imports in July 2012, Japan in December 2013, and South Korea also lifted its longstanding ban on Thai uncooked chicken meat in November 2016. This helped to raise the export of chicken meat products. Other countries that have lifted their bans on Thai chicken meat include the EU, Japan, Hong Kong, South Africa, Bahrain, Russia, United Arab Emirates (UAE), and Qatar.

-592455542934900
According to the United States Department of Agriculture reports that in 2017, bird flu is widespread in Asia (China, Myanmar and South Korea), Africa, Europe, Russia and the United States. The presence of bird flu in many main competitors’ nations but its absence in Thailand constitutes an opportunity for Thai producers to expand their export markets significantly. Thailand export volume had a double-digit growth year on year. This volume is even higher in Japan, the number one importer, where the number had increased by 80% after the cancellation of the import ban.-520375108450600
Export market recovering from confidences of importers and consumers
The export volume of chicken meat and Thai products has increased at over 10% per year. In 2016, Thailand exported 12 million tons of chicken meat worth over THB 86,500 million, up from 11 million tons worth of THB 81,175 million in 2015.

Thailand ranked as 9th for the production of frozen and processed chicken in the world, Thailand has been the world’s top 4th exporters since the year 2008 and the volume accounted for over 7% of the total exports volume. Thailand key markets are Japan. According to the data table below Brazil and EU are direct competitors to Thailand in both production and exports aspects. However the number one country that import frozen chicken meat is Japan. Since Japan is closer to Thailand, Thailand has an advantage over Brazil and EU in terms of cost of manufacturing, and freight cost. As for USA and China, despite being the top producers, are not the direct competitors of Thailand since they mainly produce for their domestic consumptions.

Volatility of raw materials price used in production of animal feeds
-542778466184500Corn and soybean meals are the major feed ingredients for livestock production. The fluctuation in prices of commodities such as corn and soybean has a direct impact on the cost of broiler production. The commodity price changes according to the volume of output in each season and can be determined by the demand and supply of the market. In the past there was a quota for importing of some types of raw materials used in the production of animal feeds in order to protect the prices of the domestic agricultural crops. These factors have affected the cost of production of animal feeds of the Company.
However, according to the forecast, Thailand’s chicken production is expected to increase. Due insufficiency of the domestic feed supply, the government has a policy to deregulate the import under the Special Economic Zone. As in Thai government regulation on imports of animal feed raw materials are clearer and more flexible. From this implementation, the chicken meat producers can efficiently enhance the production and benefit from lowers cost of animal feeds and overall cost of production. Therefore, the poultry industry has benefited from lower feed costs in the mid of 2016 when the price was dropped by 6.3% to THB 8.7 per kg from THB 9.3 per kg during the beginning of 2016. We expect this trend to continue given the favorable weather to support plantation.

Competition Analysis
Currently, the demand for chicken meat consumption has been increase from time to time in both domestic and international market, especially in Japan market. The underlying reasons for this raising are that the price for chicken meat is cheaper than other meats and the nutrition of chicken meat is preferred by health-conscious consumers rather than other meats.
Key players in this industry are Charoen Pokphand Foods Pcl., Thaifoods Group Pcl., Betagro Pcl., Saha Farms Co., Ltd., Cargill Meats (Thailand) Co., Ltd., etc., where only Charoen Pokphand Foods Pcl. and Thaifoods Group Pcl are listed companies in which information are publicly available.
Charoen Pokphand Foods Pcl. (“CPF”) is a leading company in the market and fully vertical integrated business, covering animal feed, poultry producer, swine producer, and shrimp integrated business as well as retail and food outlet business. It is a number one chicken products exporter in Thailand.

Like CPF, Thaifoods Group Pcl (“TFG”) is a vertically integrated chicken and swine producer, covering animal feed, breeding, and slaughterhouse, in Thailand and Vietnam. Its main business can be classified in chicken business at 70% of total revenue and in swine business at 30% of total revenue. TFG mainly focuses on domestic market.

Unlike those two companies, GFPT is only focus on chicken business. It is a fully vertical integrated chicken producer, covering feed mill, chicken farm, and slaughterhouse. GFPT provides chicken products for both domestic and international markets at 77% and 23% respectively where most of its business transaction comes from inter-company transactions.

Domestic Market
The demand for chicken meat consumption in Thailand has been increasing from time to time and is expected to increase in 2017 at approximately 2.84% YoY. As chicken product is considered to be a commodity product, customer price sensitivity is relatively high. To compete in the market, most companies aim to reduce the cost in order to increase profit margin.
Fortunately, GFPT is a fully vertical integrated chicken producer, it has gained the advantage from quality control and cost control, especially the know-how from Japanese partner, Nichirei Corporation. In addition, half of domestic sales are from associated companies e.g. McKey Food Services (Thailand) Limited and GFPT Nichirei (Thailand) Company Limited. This could enable GFPT to secure certain portion of market share. As a result, GFPT is ranked number 6 in Thai chicken production.

International Market
Like domestic market, the demand for chicken meat consumption for international market has been increasing by 0.48% YoY in 2016 and is expected to increase by 1.18% YoY in 2017 where majority of the demand comes from USA, China, and the European Union respectively. Especially Japan market, the demand for chicken product import has been demanding aggressively by Japan at 2.03% YoY in 2016 due to the appreciation of Brazilian Real against US Dollar. Thus, Japan prefers chicken products from Thailand to Brazil.

In addition, many countries have lifted the import ban of Thai chicken products, previously caused from Avain Flu outbreak. As Thai chicken producers has developed the system to prevent the Avian Flu and gained the confidence back from customers, Thailand is enable to increase its market of exporting chicken products worldwide and ranked number 4.

Due to the joint venture agreement with Nichirei Foods Inc., a subsidiary of Nichirei Corporation which is one of the leading poultry business in Japan, GFPT is enable to exploit the opportunity in Japan market as well as Japanese know-how to improve its productivity and efficiency. As a result, 50% of total company export goes to Japan and GFPT is ranked number 3 in Thai chicken export.

In conclusion, with high capital requirement, cost advantage, quality product, brand image, strong relationship with customers, and competitive advantage, GFPT is being ensured for its bright future within the industry
Investment Summary
With the team analysis and fundamental assumptions, the valuation suggests the target price of GFPT at 21.00 THB/share which is higher than the actual price as of 9 November 2017 at 17.50 THB/share, equivalent to an upside gain of 20%. Thus, the stock price is currently undervalued and therefore should BUY this stock.

Cyclical Stock that Moves with the Markets
-615950536638500
The Gross Domestic Product (GDP) of Thailand’s economy rose by 4.30% YoY in Q3/2017 which is higher than the growth of 3.8% YoY in Q2/2017. Thai economy is expected to continue in a positive momentum due to the improvement in private consumption, investment in infrastructure, and exports of goods and services. According to Table *, the regression of GFPT’s annual revenue and Thailand GDP shows a positive correlation between two variables with a positive coefficient at 0.49, meaning that as GDP increases, GFPT’s annual revenue tends to be increase in the same direction.

As chicken product is considered to be a commodity product which tends to move along with the GDP growth; therefore, GFPT is considered to be a cyclical stock that offers growth potential as during the economic strength. As GDP is expected to increase, the performance of the company is also expected to increase as well.
Strong Demand for Chicken Consumption Accelerates Business Growth
Currently, the demand for chicken meat consumption has been increase from time to time in both domestic and international market, especially in Japan market. As a result, the revenue compound annual growth rate from Y2007 to Y2016 is 9% per annum.

Figure * GFPT Consolidated Revenue Y2007 – Y2016

Source: Company Analyst Meeting Report
Domestic Market
Table * Chicken Meat Production, Consumption and Export in Thailand

Source: Office of Agricultural Economics, Thai Customs
There is an increasing trend for domestic chicken meat consumption in Thailand and the demand for Y2017 is expected to increase by approximately 2.84% YoY. The underlying reasons for this raising are that the price for chicken meat is rather cheaper than other meats and the nutrition of chicken meat is preferred by health-conscious consumers rather than other meats.
International Market
Table * Global Chicken Meat Consumption by Country (in Thousand Tons)

Source: Office of Agricultural Economics
The demand for chicken meat consumption has been increasing by 0.48% YoY in 2016 and expected to increase by 1.18% YoY in 2017 where majority of the demand comes from USA, China, and the European Union respectively. In addition, the demand for chicken product import has been demanding aggressively by Japan at 2.03% YoY in 2016.
Table * Japan Chicken Meat Import (in Thousand Tons)

Source: Office of Agricultural Economics
Operational Excellence
Figure * GFPT Gross Profit Margin

Source: Team Analysis and Company Annual Report
GFPT is a fully integrated poultry business which covers feed mill, grandparent chicken farm, parent chicken farm, broiler farm, chicken evisceration and processed food production. With this integration, GFPT is enable to exploit the advantage of cost and quality control throughout the production process. In addition, the company continues to improve its chicken meat production process in multiple aspects including (1) expanding backward integration to improve cost efficiency, (2) utilizing modern machinery in the production process to increase production efficiency, (3) improving feed formula that contains high nutrition, (4) improving chicken farming system to prevent outside germs, and (5) implementing a traceability system in order to track and monitor the quality throughout the production process. The company’s past improvements have been focused on lowering production cost and preparing for price competition.

Pursuing Organic Growth by Investing in Capital Expenditure
To expand its business, GFPT plans to invest in capital expenditure in order to increase production capacity in broiler farm (capacity at 384,000 birds per day by 2020), slaughter house (capacity at 150,000 birds per day by 2020), and meat processing plant (capacity at 24,000 – 25,000 MT per year by 2022). Even though the investment requirement is high at approximately 800 – 1,000 million Baht per year, the company foresees the potential future growth in compliance with the growth in chicken demand, both domestic and international markets.
Market Expansion through a Joint Venture Company
Joining with business partners, GFPT is enable to exploit the market expansion opportunity. As a result, the share of profit from associated companies has been increasing from time over time.

Table * Share of Profit from Associates (in Million Baht)

Source: Company Annual Report
Importantly, as Japan is the most important market of chicken meat, GFPT has jointed venture with Nichirei Foods Inc. in order to produce and distribute processed foods and cooked chicken meats for both domestic and international markets, especially Japan. By having a Japanese firm as a business partner, it would allow GFPT to expand its market based in Japan market smoothly. Thus, GFPT Nichirei (Thailand) Co., Ltd., a joint venture company, has become one of the key exporters in the market.

Valuation
Adjusted Present Value Method
The valuation of GFPT is was derived from an adjusted present value method to determine the appropriated intrinsic stock value. By using the discount cash flow approach, cost of capital assumes that the capital structure of the business will remain the same in perpetuity. But for the GFPT, the capital structure is unstable and extend to reduce its debt level over time and by using discount cash flow approach the effects of the leverage would show up in the cost of capital. Therefore our group decided to use an adjusted present value method instead of discounted cash flow because the company has tax implications and also unstable capital structure.
The company growth potential as the outlook for Thai frozen and processed chicken industry is strongly positive due to growing consumer demand in export markets. This method. This method is suitable under the assume length of timeframe where GFPT was forecasted for ten years from Y2017 to Y2026. The adjusted present value method (APV) method arrived at the value per common share of THB 22.00. Therefore, the appropriated target price for GFPT under an adjusted present value method is THB22.00 with the recommendation of “BUY”
Project Cash Flow and Assumptions
The projected revenue growth rate assumption for GFPT as follow.

Table * Growth Assumptions
Source: Team Analysis
According to the Thailand Industry Outlook, the industry was forecasted to have high growth potential over the next three years. As the chicken is a commodity product which is not greatly prone to changes of the economy. Growth from the domestic market forecasted
In the first year (Y2017), growth rate at 8.1% in align with the management’s target within range of 5-10%. Growth from domestic at 5% as the outlook for Thai chicken industry is positive due to growing consumer demand, economies of scale and forecasted to see solid growth over the next three years. Also growth from international market at 3.1% came from many reason the lifting of import ban from trading partners, increase demand from Japan and Asian market, internal trouble of broiler industry in China, and government measures of imports of animal feed raw materials are clearer. Resulted in increased demand for Thai products and lower cost of sales due to lower price of raw material of feed
In the second and third year (Y2018-2019), forecasted growth rate at 6.5% primarily from solid growth of consumer demand. Even though the outlook for the industry is in a good trend, strong price competition and unpredictable climate will tend to destabilize and costs of animal feed may rise on climatic disruption. As well as the increase competition as a result of rising labor and production costs. Also Thai producers may also exposed to risk as they rely on foreign suppliers and Thailand producers still has to monitor the risk of Avian Flu outbreak. Therefore the forecasted growth rate dropped by 1.6%.

In the fourth and fifth year (Y2020-2021), the forecasted growth rate at 4.8%. Transition period.

From the year sixth onwards (Y2022), the forecasted long term growth rate at 3.0% align with forecasted Thai’s gross domestic product. As the chicken products are consumption goods that marked the largest GDP component therefore the long term growth rate is based on the economic performance.

Cost of Good Sold
With the ASEAN Economic Community giving Thailand opportunity of free flow of goods throughout the region which reduce transaction costs and help to drive down the cost of goods produced in the region. The AEC will ease the flexibility to transfer resources, capital, labor and larger international trade which lower production cost including relocation of production base to the countries with lower wages.
Also the Company is preparing for price competition by developing technologies to produce the products that meet the needs of consumers and sufficient for the market demand. The Company has improved its chicken meat production process in multiple aspects including: expanding backward integration to become a fully vertical integrated chicken producer, utilizing modern machinery in the production process to increase production efficiency, using nutritious feed in order to obtain nutritious chicken meat, improving feed formula and having effective chicken farming system in order to lower production costs. These facts will impact the revenues and operations of the company.

Tax Benefit and Privileges from Investment Promotion
The company, its subsidiaries, and joint ventures were granted investment promotional certificates from the Board of Investment (BOI) as follows:
Table * Tax Benefit and Privileges

Source: Company 56-1 Report
The privileges granted the exemption of import tariff of machinery. It also granted the exemption of corporate income tax on net profits from investment of promotional activities not exceed 100 percent of total investment of the project excluded the value of land and working capital for eight years commencing from the first day when the Company starts to earn income from the operation of promotional operation. Therefore the company subjected to effective tax rate approximately at 11% as of the Y2017. The effective tax rate of the company is expected to increase accordingly with the expire of investment promotional certificates.

Capital Expenditure (“CAPEX”)
The capital expenditure has a positive relation with the increase in sales as the company planned its future organic growth by emphasizing on the upstream chicken expansion of chicken farm areas with the investment budget of THB 800-1,000 million per year. As the demand for processed chicken meat increased and the production capacity of both GFPT and McKey are inadequate. The company has expanded its food processing plant on 700 rai in Tungkwang district. Phanat Nikhom District Chonburi province to increase production capacity to meet consumer demand. In the first five years (Y2017-2022), the forecasted according to the investment plan of the company which separated into two phrases.
Table * Capital Expenditure Assumptions
Source: Team Analysis and Company Annual Report
Phrase I
Investment in chicken cutter and food processing plant to increase production capacity of 300,000 chickens per day, commencing in June 2017. It is expected to be completed in 2020 with a total investment of about 3,000 million baht.

Phrase II
An investment in Phrase II will increase its processing capacity by 24,000 tons per annum. It will be completed in 2022 with a total investment of approximately 2,000 million Baht.
From the Y2022 onwards, forecasted the invest in capital expenditure according to the property, plant, and equipment needed to support sales by maintained at 40%. Lastly the investment will be paid mainly from cash flow from operation, short-term loans, and long-term loan
Dividend Policy
The dividend policy of GFPT is “to pay dividend at the rate of not more than 50% of net profit of the Company’s separate financial statement. The company historical payout ratio from Y2013-Y2016 were 28.9%, 28.2%, 26.2% and 22.9% respectively. According to the IR report as of Y2017 (Quarter 3) reported dividend payout ratio for the Y2017 is expected to be at 30%. Therefore our group forecasted 30% dividend payout ratio to be the same since Y2017 onwards.

Unleveraged Cost of Equity
Cost of Equity for Unlevered Firm
In order to compute the unleveraged cost of equity, we obtained the leverage beta from the Stock Exchange of Thailand as of 9 November 2017 at 1.27x. Moreover for the effective tax rate, according to the IR Presentation as of quarter3 reported at 11% and the current debt/equity ratio of the company is at 28%. Therefore the unleveraged beta of the company is at 1.02x.

Table * Cost of Equity for Unlevered Firm

Source: The Stock Exchange of Thailand, Trading Economics and Market Risk Premia
Furthermore for the risk free rate, we obtained yield on 10-years government bond at 2.4% and also an implied market return as of November 2017 at 7.1%. As a result, we got unleveraged cost of equity at 9.6% using a capital asset pricing model
Cost of Equity for Terminal Value of Tax Benefit
In order to compute cost of equity for terminal value of tax benefit, our group need to find a relevant peer with stable debt to equity ratio in order to compute the unleveraged beta. Our group decided to use NH Foods Ltd. Which listed in the Stock Exchange of Japan.

Table * Cost of Equity for Terminal Value of Tax Benefit

Source: Thomson Reuters, Trading Economics and Market Risk Premia
In order to find beta, we assumed to tax shields have same risk as operating assets and debt is risk free. Therefore our group used to formula above to compute the unleveraged beta at 0.30. As a resulted, the unleveraged cost of equity at 4.5%.

Cost of Debt
As the firm is trying to change to capital structure by lowering the leverage level and remain at around 25-30%. Therefore the forecasts after Y2017, the debt to equity ratios will remained quite stable.
Table * Cost of Debt

Source: Team Analysis and Company Annual Report
According to the company’s analyst meeting as of quarter 3, reported that the financial cost will be charged at 2.5%. For that reason, the cost of debt since Y2017 onwards were forecasted to be the same at 2.5%.

Adjusted Present Value Method
Using APV method, we estimate the value of the firm in three steps: value of firm with no leverage, present value of the interest tax savings, and the expected cost of bankruptcy of the firm. According to the assumptions, the estimated free cash flow to firm is discounted using an unleveraged cost of equity by valuing the firm as if it has no debt. The value of unlevered firm is at THB 28,045 million.

The second step is finding the expected tax benefit from borrowing. We find the value of tax benefit from the forecasted interest expense and the effective tax rate. Also we find the terminal value of tax benefit using the formula below.

Table * Terminal value of tax benefit

Source: Valuation 5th edition Mckinsey
Therefore we got the value of tax benefit according to the firm level of debt at THB 2,786 million.

The third step is estimating probability of bankruptcy at the given level of debt of the firm and. The company was rating at “BBB+” until the year Y2015 with stable outlook. Consequently the defaulted rate is at 2.3%. Cost of Bankruptcy was estimated at 10% as chicken is a commodity product. As a resulted the expected bankruptcy cost is at THB 65 million.

The value of the operating assets of firm can now be estimated by combining the value of unlevered firm with the value of tax benefit and deduct with the expected bankruptcy cost. Adding the cash and non-operating assets, as a result the value of firm is at THB 31,155 million. Moreover the market value of debt was at THB 3,814 million to obtain value of equity at THB 27,341 million. There ar1, 253 shares of GFPT outstanding, we can derive the value per share at 21.81 THB.

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Relative Valuation Method
Apart from the discounted cash flow valuation method, relative valuation method can be used to estimate the target price by using multiples based on either its own self or comparable firms in terms of business structure and exposure to risk. The multiples that will be applied are (1) Forward Price to Earnings Ratio (“Forward P/E Ratio”), (2) Forward Price to Book Ratio (“Forward P/B Ratio”), and (3) Forward Enterprise Value to Earnings before Interest and Tax Ratio (“Forward EV/EBIT Ratio”).

Forward P/E Ratio
Forward P/E Ratio is the ratio of the market value of equity to the expected earnings in relation to the future prospects of the company. Forward P/E Ratio allows investors to get insight how the market participants perceive about the company’s future prospects and how much they are willing to pay for. However, this multiple has a major drawback in which it does not take into account the impact of capital structure.

To reflect the future prospect of the future, Forward P/E Ratio is preferable to Trailing P/E Ratio or Historical P/E Ratio as investors are usually invested today with the expectation of gaining a future return in relative to expected growth.

Forward P/E Band
Forward P/E Band can be calculated by (1) retrieving historical prices from Thomson Reuters, (2) multiplying compound annual growth rate of earning per share in the last 3 years of each period with actual earnings per share in each year in order to get forward earnings per share, and (3) calculating for the average, upper bound, lower bound and Standard Deviation (“SD”) at ± 1.0 and 2.0.

Figure * Forward P/E Band

Source: Thomson Reuters and Team Analysis
The target price of GFPT is calculated by using +2.0 SD Forward P/E Ratio at 12.16 times multiplies with expected earnings per share at 1.42 THB; as a result, the target price is 17.29 THB/share. However, the actual price is 17.50 THB/share which is higher than the target price; thus, GFPT stock is currently overvalued.

Peers Forward P/E
Peers Forward P/E can be calculated by (1) retrieving forward price to earnings per share ratio from Thomson Reuters in each peer, (2) calculating for an average by using a median, adjusting for a normal distribution of return assumption, and (3) multiplying the median multiple with GFPT’s expected earnings per share.

Table * Peers Forward P/E

Source: Thomson Reuters and Team Analysis
Peers Forward P/E suggests that GFPT’s target price should lie between 19.39 to 53.72 THB/share with the average price at 21.83 THB/share. However, the actual price is 17.50 THB/share which is lower than peers’ minimum target price; thus, GFPT stock is relatively undervalued if comparing to peers.

Forward P/B Ratio
Forward P/B Ratio is the ratio of the market value of equity to the expected book value of equity in relation to the future prospects of the company. This multiple allows investors to get insight how much the market participants are willing to pay the premium above the company’s assets. Major drawback is that the accounting book value can be easily manipulated due to different accounting standards, type of assets, fair value measurement, etc.

Forward P/B Band
Similar to Forward P/E Band, Forward P/B Band can be calculated by (1) retrieving historical prices from Thomson Reuters, (2) multiplying compound annual growth rate of book value of equity per share in the last 3 years of each period with actual book value of equity per share in each year in order to get forward book value of equity per share, and (3) calculating for the average, upper bound, lower bound and Standard Deviation (“SD”) at ± 1.0 and 2.0.

Figure * Forward P/B Band

Source: Thomson Reuters and Team Analysis
The target price of GFPT is calculated by using average Forward P/B Ratio at 1.73 times multiplies with expected book value of equity per share at 8.59 THB; as a result, the target price is 14.85 THB/share. However, the actual price is 17.50 THB/share which is higher than the target price; thus, GFPT stock is currently undervalued.

Peers Forward P/B
Peers Forward P/B can be calculated by (1) retrieving forward price to book value of equity per share ratio from Thomson Reuters in each peer, (2) calculating for an average by using a median, adjusting for a normal distribution of return assumption, and (3) multiplying the median multiple with GFPT’s expected book value of equity per share.

Table * Peers Forward P/B

Source: Thomson Reuters and Team Analysis
Peers Forward P/B suggests that GFPT’s target price should lie between 10.45 to 39.30 THB/share with the average price at 18.46 THB/share. Even though the actual price of 17.50 THB/share lies within the range, it is lower than the average; thus, GFPT stock is relatively undervalued if comparing to peers.

Forward EV/EBIT Ratio
Forward EV/EBIT Ratio is the ratio of the enterprise value to the expected earnings before interest and tax in relation to the future prospects of the company. Unlike P/E and P/B Ratios, EV/EBIT Ratio is the valuation multiples based on enterprise value which represents the value of the business to all stakeholders. This enterprise value multiple has taken into account the effect of non-cash expenses and capital structure as it focuses on the free cash flow to firm as well as provides a sound comparisons among various companies with vary capital structures. In this case, since GFPT has very small amount of amortization in relation to sales, EV/EBIT multiple is applicable to value the business to all stakeholders which is taken above factors into consideration.

Forward EV/EBIT Band
Forward EV/EBIT Band can be calculated by (1) retrieving historical enterprise value from Thomson Reuters, (2) multiplying compound annual growth rate of earnings before interest and tax in the last 3 years of each period with actual earnings before interest and tax in each year in order to get forward earnings before interest and tax, and (3) calculating for the average, upper bound, lower bound and Standard Deviation (“SD”) at ± 1.0 and 2.0.

Figure * Forward EV/EBIT Band

Source: Thomson Reuters and Team Analysis
The target price of GFPT is calculated by multiplying the multiple with the expected earnings before interest and tax; using +1.0SD Forward EV/EBIT at 15.60 times; as a result, the expected enterprise value can be defined. In order to define target price, the expected enterprise must be added the value of non-operating asset and deducted the value of debt then divided by number of shares outstanding. As a result, the target price is 23.25 THB/share. However, the actual price is 17.50 THB/share which is lower than the target price; thus, GFPT stock is currently undervalued.

Peers Forward EV/EBIT
Peers Forward EV/EBIT can be calculated by (1) retrieving forward enterprise value to earnings before interest and tax ratio from Thomson Reuters in each peer, (2) calculating for an average by using a calculating for an average by using a median, adjusting for a normal distribution of return assumption, and (3) multiplying the median multiple with GFPT’s expected earnings before interest and tax, (4) adding value of non-operating assets, (5) subtracting value of debt, and (6) dividing number of outstanding shares.

Table * Peers Forward EV/EBIT

Source: Thomson Reuters and Team Analysis
Peers Forward EV/EBIT suggests that GFPT’s target price should lie between 18.00 to 53.27 THB/share with the average price at 21.95 THB/share. Even though the actual price of 17.50 THB/share lies within the range, it is lower than the average; thus, GFPT stock is relatively undervalued if comparing to peers.

To determine the target price from relative valuation method, the multiples of its own self are preferable than the Peers Forward multiples as these Peers Forwards multiples come from different companies with different business structure and capital structure. Given the 55% of weight to Forward EV/EBIT as a representative for the major shareholders, Sirimongkol Family, and the rent of weight to Forward P/E and Forward P/B equally as a representative for minor shareholders; as a result, the target price is 20.02 THB/share, suggesting investors to BUY.

Weighting of the Valuation Methods
Table * GFPT Target Price

Source: Team Analysis
Combining Discounted Cash Flow method and Relative method, it would be necessary for long-term investors, Sirimongkol Family, to concern fundamental factors in the valuation. Thus, the percentage of Sirimongkol Family’s shareholding ratio at 55% would be assigned to DCF method. Another 23% of total weight is being assigned to Forward EV/EBIT multiple method as this is the shareholding proportion that foreign and local funds hold, understanding that foreign and local funds are treated as strategic investors who are knowledgeable and expertise in valuing the business. Lastly, 22% of total weight is being assigned to Forward P/E multiple as this is the proportion that minor shareholders, mostly individual investors, hold, assuming that most individual investors tends to have short-term investment horizon and concern only equity value. In conclusion, the target price of GFPT is 21.00 THB/share which is higher than the actual price of 17.50 THB/share, suggesting investors to BUY.

Impact and Application
Scenario Analysis
Our team conducted a scenario analysis to evaluates the expected value of a target price is response to an unexpected events.

Table * Scenario Analysis

Our group assumed 60% probability for base case as GFPT is a stocks related to the consumption. We forecasted that the demand for chicken products would not fluctuated. Also the company terminal growth rate align with forecasted Thai’s gross domestic product. As the chicken products are consumption goods that marked the largest GDP component therefore the long term growth rate is based on the economic performance. Moreover the company has improved its chicken meat production process in multiple aspects to utilizing modern machinery in the production process to increase production efficiency in order to lower production costs. Therefore the %Cost of goods sold is expected to remain steady.

For best case scenario, our group assumed to be at 20% where company can maintain longer high growth period. Also effectively lower the cost level.

Worst case scenario also at 20%, mainly from uncontrolled factors for %Cost of goods sold. For example, oil price, feed materials cost, and the raise of minimum wage.

Sensitivity Analysis
The BUY recommendation is based on team analysis with the upside gain approximately 20%; however, the suggested target price at 21.00 THB/share is exposed to the valuation risk due to the changes in assumptions. In this case, the target price is vulnerable to a change in terminal growth rate and a change in terminal discount rate (terminal unlevered cost of equity of firm); thus, it would be necessary to construct a sensitivity analysis to identify the impact of these variables on the target price. As a result, the price ranges between 17.64 and 30.13 THB/share which still suggests the BUY recommendation.

Table * Sensitivity Analysis

Source: Team Analysis
Financial Statement Analysis:
Summary figures from financial statement
Income Statement
Income statement: for the year 2016 GFPT’s revenue from sales was at THB 16,693 million with growth at +1.4% YoY. An increase in revenue mainly from chicken processing segment at +8.43% while revenue from feed segment declined at -12.33%. Comparing to TFG’s revenue from sales at THB 20,626 THB with growth at +19% YoY, TFG’s revenue is 1.2x of GFPT’s revenue. For the cost of sales, GFPT was at THB 14,191 million accounted at 85% of sales, lower than last year at -1.88% mainly from lower cost of feed materials. On the other hand for TFG was at THB 18,005 million accounted at 87% of sales. The company spent SGA expenses at 7.4% of sales higher than TFG at 4.6%, the increased in SGA was from of higher export volume and increasing of miscellaneous cost. The company paid THB 98 million (0.6%) for finance cost while TFG paid at THB 245millions (1.2%) for business operation. TFG paid higher finance cost as the company has higher interest bearing debt outstanding. By the end of 2016, GFPT earned THB 1,644 million at 9.8% of sales while TFG earned THB 1,447 million at 7.0% of sales. This can be implied that GFPT has a better cost management.

Table * Income Statement

Source: GFPT and TFG Financial Statements
Financial Position
In term size GFPT and TFG is relatively the same. Total assets of GFPT was around THB 16,160 million while TFG was around THB 15,596 million. Cash & equivalent and trade & other receivables of both companies also at the same level comparing to portion to sales. For GFPT’s trade and other receivables, the company allowance for doubtful accounts was at 3.65% of total trade receivable. Inventories marked a significantly portion for both company, GFPT at 23% while GFT at 17%. Inventories of GFPT was high due to high stock level of feed material as the company build storage. Moreover for TFG has biological assets at THB 2,726 million as the company utilizes contract farming system to raise poultry and swine. As of 31 December 2016, the company has 489 poultry’s farmers contracted and 341 swine farmers’ contracts. The contract was around three years therefore the company recorded under the current asset.

Table * Financial Position

Source: GFPT and TFG Financial Statements
Furthermore for the liabilities and equity, GFPT mainly financed from equity while TFG mainly finance from short-term loans. For total liabilities of GFPT decreased from last year at -2.7% primarily from long-term loans from financial institutions however short-term loans from financial institutions increased at THB 144 million. All the loans of the company are in THB currency, the company has no exposure to the exchange rate risk. The shareholder’s equity increased by +14.15% from last year, mainly from increased in retain earning.

Common Size Analysis
Income Statement
Overall, GFPT and TFG have managed equally portion in each item of income statement such as sales, others income, and cost of revenue. Others income of GFPT marked at THB 280 million, mainly from share of profit from associates. Administrative and selling expenses are 7.4% for GFPT and 4.6% for TFG. TFG paid large amount of financial costs at THB 245 million comparing to GFPT at THB 98 million as the company has large amount of short team loans outstanding. However, TGF was subjected to lower income tax expense as the company gained income tax benefit from operating loss carryforward from Y2015. Resulting in effective tax rate of only at 6.7% of EBT. GFPT also manage it tax right and exercise all their rights to get tax exempts in some project at effective tax rate of only 11% of EBT.

Table * Common size of Income Statement

Source: GFPT and TFG Financial Statements
Financial Position
For GFPT’s total assets composed of current assets at 30% and non-current assets at 70%. The major items in assets are inventories, investment in associates, and property, plant, and equipment representing 23%, 15%, and 46% respectively. For GFPT’s total assets as of Y2016 increased in amount of THB 1,184 million of 7.91% from last year from an increase in property, plant, and equipment at THB 678 million, increased in inventories at THB 480 million, and increase in investments in associated of THB 323 million.

Table * Common size of Financial Position

Source: GFPT and TFG Financial Statements
For TFG’s total assets composed of current assets at 45% and non-current assets at 55%. The major items in assets are inventories, and property, plant, and equipment representing 17%, and 41% respectively. Both companies property, plant equipment have been increasing, the reason for an increase due to the additional land, farm, and factory to support the increasing capacity, machinery for export product and more efficiency production. Moreover for a large portion of inventory due to an increased in raw material for increased feed mills production as the company increased the production capacity.

Table * Financial Position

Source: GFPT and TFG Financial Statements
For GFPT’s Total liabilities and equity composed of total liabilities at 33% and total equity at 67%. Short-term loans accounted over12% as the company lowering the long-term loans from financial institutions and increased short-term loan from financial institution instead. The retained earning accounted at 55% from total liabilities and equities, large contribution come from an increased in retained earning amount.

For TFG’s Total liabilities and equity composed of total liabilities at 59% and total equity at 38%. Short-term loans accounted over 36% and issued and paid-up share capital accounted over 33%. An interest-bearing debt of company increased by +12.85% from last year primary from an increased in short-term borrowing from financial institutions represented at 85.31% and long-term borrowing from financial institutions represented at 14.60%. An increased in interest-bearing debt due to the business expansion. An equity of the company increased by 31.7% due to the company has improved performance as a result of decreasing deficit.

Trend Analysis
Relative Level Income Statement
GFPT
Revenue from sales of GFPT’s main operation shown an increasing trend within the past five years. That was a dropped of sales in Y2015 as the company had lower revenue from chicken processing business mainly from decreasing in export volume of chicken meat products and lower price of chicken meat and parts in domestic market. However the company was able to pick up the sales in Y2016 mainly from the export volume growth from chicken processing segment which accounted over 43.19% of total revenue.

Despite the increased in revenue from sales in Y2016, the company was able to lower cost of sales -1.88% down from last year mainly from lower cost of feed materials. As the market price of feed materials including corn and soybean reduce approximately by 8-9%.

The selling and administrative expenses of the company gradually increased in Y2011 as the company increased an export volume therefore the selling and administrative expenses increased since higher freight cost from higher export volume and increasing of miscellaneous cost.

Share profit from associated companies based on the equity method shown an increasing trend since 2012 mainly from profit contributed from GFN at THB 135 million and McKey at THB 236 million as of 2016.

The net profit was low in Y2012 due to the higher production costs mainly from higher raw material cost of animal feed. In the Y2016, the net profit increased by 38% from Y15. The EPS of 2016. Primarily driven from the increase in revenue from sales, lower cost of sales, and higher profit from associated companies from both McKey & GFN. The profit margin Y16 was 9.8% from last year at 7.26%.

Table * Trend Analysis of Income Statement
Source: GFPT and TFG Financial Statements
TFG
As “Thaifoods Group PCL.” was listed in the Stock Exchange of Thailand in 8 October 2015 therefore the provided publicly available information was only two years.

TFG’s revenue from sales mainly come from poultry operation accounted over 64.29% of total business. Revenue from poultry operations of Y2016 increased by 20.97% from last year as a result of an increased in volume sold and the price increased. Revenue from swine and feed operation also increased at 18.73% and 4.71% respectively.

The cost of sales also increased related to increasing sales however in Y2016 the cost of sales decreased in -0.56% due to efficiency cost management.

The selling expenses of the company gradually increased in as a result of the increased in sales of both exports sales starting in Y2015 and domestic sales to distribute sales area. On the other hand administrative expense shown decreasing trend to due efficiency cost management.
In the Y2015, the domestic chicken price reached the lowest point for the last three years. Therefore, the company was affected significantly, among others in chicken industry, and ultimately resulted as loss. However, the company’s pig and livestock business are growing continuously and showing positive gross profit in the Y2016.

Relative Level Financial Position (Asset)
GFPT
The company total asset equal to THB 16,160 million shown continuously increased since Y2011 and increased from last year at 7.91% mainly from an increased in PP&E, inventories, and investments in associations. Current assets accounted 30.41% of the total asset, cash and equivalents and trade and other receivables increased in proportionally with sales. An increased in inventories due to increasing in feed materials. Moreover for property, plant and equipment accounted over 45.98% of total assets. The Company invest in capital expenditure more than THB 1,000 million every years in order expand the capacity to support increasing domestic demand and export sales. The assets is forecasted to continue increasing due to the GFPT Group expansion vision to 2020.

Table * GFPT: Trend Analysis of Financial Position (Asset)

Source: GFPT Financial Statements

Table * TFG: Trend Analysis of Financial Position (Asset)

Source: TFG Financial Statements
TFG
Total assets of the company were THB 13,206, THB 12,778, and THB 15,596 million respectively. Cash and cash equivalents of the company increased accordingly to sales while inventories of the company shown decreasing trend as a result of changing in accounting treatment because the company adopted new TFRS method. For the property, plant, and equipment continuously increase due to the additional land, farm, and factory to support the increasing capacity, machinery for export product and more efficiency product.

Relative Level Financial Position (Liabilities and equity)
Table * GFPT: Trend Analysis of Financial Position (Liabilities and Equities)

Source: GFPT Financial Statements
GFPT
Total liabilities of the company decreased at -2.74% from Y2015 mainly from the long-term loans from financial institution decreased and turn to finance using he short-terms loans from financial situations instead. The short-terms loan from financial institution increased by THB 144 million this year. The trade and other payables of the company increased by +8.96% from Y2015.

The shareholders’ equity shown significantly increased in trend since Y2012, increased by +14.15% from Y2015. The increased primarily from the increase in accumulated retain earning.

TFG
Company’s total liabilities mainly comprises of short-term borrowing from financial institutions, trade and other accounts payable and finance lease liabilities. The short-term loan dropped in the Y2015 as the company repayment loan from fund generated from initial public offering. However in the Y2016 there was increased in short-term borrowing due to the business expansion and the company was mainly finance using short-term borrowing represented 85.31% of interest-bearing debt and long-term borrowing at 14.69%. Trade and others accounts payables Y2015 (-0.92%) and Y2016 (+23.01%)
Table * TFG: Trend Analysis of Financial Position (Liabilities and Equities)

Source: TFG Financial Statements
At the end of Y2015, total equity increased by +19.35% as the company issued new share through initial public offering in the amount of 1,100 million shares at THB 1.95 per share (Par value at THB 1 per share and premium on ordinary shares at THB 0.95 per share) as a result of an increase in issued and paid-up share capital of THB 1,100 million and premium on ordinary shares of THB 981.24 million while he Y2015 the company had deficit amount of THB 1,553 million. By the end of Y2015, the company was able to improve the performance and the deficit amount was reduced to THB 77.7 million.

Financial Ratios
Return
Table * Financial Ratios: Return

Source: GFPT and TFG Financial Statements
Gross Profit Margin
GFPT had average gross profit margin at 15% over the past five years, the margin gradually increased since the Y2013. Key driver same from higher export volume of cooked chicken product, improved selling price of chicken meat products, lower feed material cost, expansion of meat retail outlets in various provinces in Thailand and profit from associated companies.
Gross profit margin of TFG were unstable +12%, -3.4%, +13% respectively from the Y2013. The volatile came from the cost of sales as for the Y2015 the cost of sales increased by+19.75% related to increase in sales however in the Y2016 the company was able lower the cost due to efficiency cost management.

EBIT Margin and Profit Margin
EBIT and profit for GFPT increased correspondingly with gross profit margin. Despite a slightly declined in the Y2015 primarily due to a loss in poultry operations for the decline in the chicken price and higher production cost of underutilized capacity of export production factors. The company was able to turn around and increased the profit due to additional higher profitability channels, efficiency cost management which comprised of raw material management, breeder efficiency, and administrative expense management.

For TFG, the company has to bear high selling and administrative expenses. The cost increased as a result of the increasing in sales of both export sales starting in Y2015 and distribute sales in domestic area. However in the Y2016, the company was able to efficiency control the cost. The company also has to bear high finance cost due to a higher amount drawn on banking facilities for purchase raw material to support the increased in production capacity. In the Y2016, the company was able to lower fiancé cost as the company repaid the loan from fund generated from initial public offering therefore the profit margin of the company increased.

ROA and ROE
Table * Financial Ratios: Return

Source: GFPT and TFG Financial Statements
In terms of ROA, GFPT was able to operate at a higher percentage return that its competitor. However in the Y2016, TFG was able to manage the business operation and increased the ROA almost at the same level as GFPT. Both company successfully increasing assets with align in an increased in return.

Trend of ROE was similar with ROA, however ROE of TFG were higher than GFPT in the Y2014 and Y2016. The most recent year shown that ROE of TFG was at 24% comparing to GFPT’s ROE at 15%. This indicates that TFG can generate more return to the common shareholders.
Short Term Liquidity Risk
Table * Financial Ratios: Short term Liquidity Risk

Source: GFPT and TFG Financial Statements
Current Ratio and Quick Ratio
GFPT was able to maintain the ratio at appropriate level for its operation and had a strong financial position. As the Y2016 the current ratio was 1.54 times, slightly decreased from Y2015 at 1.63 times as the company inventories increased correspondingly to sales. The quick ratio in Y2016 was 0.37 times, decreased from Y2015 at 0.53 times
Current ratio of TFG were lower than GFPT and shown concerns as the current liabilities exceed the amount of the current asset. For a quick ratio, TFG was higher that GFPT in the recent year at 0.53x and 0.39x. The results shown that TFG has lower liquidity risk and the GFPT’s ratio dropped as the company increased inventory and receivable.
Cash Conversion Cycle
Table * Financial Ratios: Cash Conversion Cycle

Source: GFPT and TFG Financial Statements
GFPT shown relatively high cash conversion cycle on average at 85 days comparing to TFG at 51 days. The number showing that TFG was able to effectively manage and implies a good overall health of the company. TFG was able to convert cash on hand to inventory and account payable, through sales and accounts receivables, and then back into cash fast than GFPT.

Long Term Solvency Risk
Debt to Equity Ratio and Interest Coverage Ratio
GFPT
The company has a strong financial position as of Y2016 the debt to equity ratio was 0.5, decreased from last year at 0.59. As a result of strong position of the company and subsidiaries of GFPT, the company was able to repay the debt obligations including trade payables and other payables, short term loans, and the current portion of long-term loans from financial institutions. Resulting in lower ratio and lower leverage level. The company still had available credit line including short-term borrowing (bank overdraft), letters of credits, and trust receipts. The company had appropriate capital structure.

Table * Financial Ratios: Long term Solvency risk

Source: GFPT and TFG Financial Statements
TFG
The debt to equity ratio of the company is relatively high as the company mainly finance through debt. However the Y2015 the company issued new shares through initial public offering. Therefore the equity of the company increased by +31.7% from Y2015 and lowering the debt to equity ratio. By lowering the debt to equity ratio also lowering the financial distress.

Investment Risks and Downside Possibilities
GFPT’s business performance can be affected by several potential risks which can be classified into 5 aspects. The risk matrix table below is being used to measure the level of risk by considering the likelihood and consequence severity of each risk.

Figure * Risk Matrix

Source: Team Analysis
Environmental Risk
1.Avian Flu Outbreak | ER1
As Avian Flu is occurred directly to poultry animals, the demand of chicken consumptions would be decreased significantly in both domestic and international markets. In the past, GFPT could not export fresh frozen chicken and processed chicken to Japan due to the outbreak of Avian Flu. Even though many countries have lifted the import ban of chicken product from Thailand, if there is an outbreak of the Avian Flu again, Thai chicken producers may be negatively affected by that circumstance.

Mitigation Approach: GFPT has been constantly monitoring the potential of any disease outbreak in both domestic and international markets in order to take action promptly. The company has also been improving chicken farm management system by using Evaporative Cooling System (EVAP) to prevent outside air that may contain germs. As a result, GFPT has been certified by the Department of Livestock, Ministry of Agriculture and Cooperatives for the good agricultural practices.
2.Natural Disaster | ER2
Any natural disaster such as flood, storm, earthquake, etc. would affect the company performance significantly. As GFPT’s main raw materials are corn and soybean meal, these agricultural products can be affected directly from the natural disaster which can reduce the production volume. As a result, the company’s production cost and chicken production volume can be uncertain.
Mitigation Approach: Even though the natural disaster factor is uncontrollable, GFPT has been preparing and reviewing the contingency plan to cope with potential incidences constantly.

Regulatory Risk
1.Non-Tax Barrier | RR1
EU import quota allows Thailand to export cooked chicken meat products containing 25% – 57% of chicken meat at 14,000 MT per year and cooked chicken meat products containing less than 25% of chicken meat at 2,100 MT. The out-of-quota tariff is Euro 2,765/MT. As GFPT exports approximately 34% of total chicken meat production to the European Union, with this import quota, the company has limited access to Europe market.

Mitigation Approach: Even though the non-tax barrier factor is uncontrollable, GFPT has been monitoring and updating the international rules and regulations for further business decision and expansion.

Market Risk
1.Changes in Consumer Behavior | MR1
Consumer behavior nowadays favors GFPT’s business; however, it is rather subjective. Consumer preference and lifestyle can change anytime and can affect GFPT’s business performance in terms of sales volume and profitability.
Mitigation Approach: Even though the changes in consumer behavior cannot be fully mitigated, GFPT has been focusing, studying, and analyzing consumer trends and preferences in order to make sound business strategies in terms of production and sales and marketing to acquire new customers and maintain existing customers.

Operational Risk
1.Volatility on Raw Feed Materials Price | OR1
Agricultural commodities such as corn, soybean meal, etc. are major sources of animal feed mill of the company. Commodity price is varied depending on the market demand and supply which is affected by the uncontrollable factors such as seasonality, natural disaster, and so on. Thus, the potential rising in commodity price tends to increase the company’s cost of production.

Mitigation Approach: GFPT has been constantly monitoring the trends of raw feed materials as well as sourcing for the alternative inputs that meet its quality standard. In addition, GFPT builds a storage to store raw feed materials to prevent any shortage that may cause the business performance and business disruption. Nevertheless, GFPT also hedges the price volatility by using derivative financial instruments in order to stabilize business performance.

2.Volatility on Oil Price | OR2
Like the volatility on raw feed materials price, the volatility on oil price would affect the company’s cost of production as well as cost of transportation. The potential rising in oil price would increase the cost of production and cost of transportation for GFPT.
Mitigation Approach: As the fluctuation of oil price is uncontrollable, GFPT has been constantly monitoring the trends of oil price in order to make a sound business decision. For example, GFPT has been reducing the production and transportation cost by improving its supply chain through establishment of new feed mill at prime location nearby its broiler farms.
Financial Risk
1.Foreign Exchange Rate Risk | FR1
As GFPT has engaged in international business transactions, the company can be affected by the uncertainty of foreign exchange rate. In terms of imports, the depreciation of Thai Baht currency would negatively affect the company’s performance. Conversely, in terms of exports, the depreciations of Thai Baht currency would positively affect the company’s performance when converting foreign currency back to home currency. However, this can have downside possibility to affect the company’s export sales.

Mitigation Approach: GFPT mitigates the risk by using derivative financial instruments e.g. forward contracts to ensure its stability of earnings by having a control over the selling price and cost.
2.Interest Rate Risk | FR2
To expand the business, GFPT is required high investment on capital expenditures by using both debt and equity financing. The changes in interest rate may affect the company’s cost of debt directly; as a result, GFPT’s business and financial performance can be affected.

Mitigation Approach: GFPT mitigates the risk by using a fixed interest-rate on debt financing rather than using a floating interest rate. This can help the company to reduce the effects from the changes in interest rate and therefore its financial obligation.

Appendix * Company History
Company history
The company was initially incorporated as a juristic person on 25 November 1981 under the name of General Foods Poultry (Thai) Company Limited. The company’s major business is to manufacture and sell fresh frozen chicken meat and further processing chicken products in both of domestic and international market. Below shown the timeline of major development of the company.

1981-1989: – The early years
The company established in 1981 consisted of three parties of shareholders:
– 51% – P. Charoen Phan Feed mill Company limited (Thailand)
– 34% – General Foods Poultry Company Limited (New Zealand)
– 15% – United Trading Corporation (Luxemburg)
However in 1985, the other two parties of shareholders withdrawn their shares so P. Charoen Phan Group purchased all the shares and increased its share capital from THB 77.7 million to THB 100 million in order to expand the production capacity to eviscerate chicken at the rate of 6,000 birds/hour. Later on in 1989, The Company increased its registered share capital from THB 100 million to THB 150 million in order to expand the production capacity to eviscerate chicken at the rate of 7,200 birds/hour. And the company’s name changed from “P. Charoen Phan Poultry Company Limited” to “GFPT Company Limited”.

1990-1999: – The company expansion
During 1990-1992 the Company increased its registered share capital from THB 150 million to THB 420 million to expand the business as an integrated chicken farm and acquired shares of four subsidiary companies.
– 99.99% – Krungthai Farm Company (FKT)
– 99.99% – Farm Company Limited (MKS)
– 99.99% – GF Foods Company Limited (GFF)
– 65.00% – Krungthai Feedmill Public Company Limited (KT)
The Company continue to increase its registered share capital from THB 420 million to THB 1,000 million and was listed in the Stock Exchange of Thailand in 1991 with the registered share capital at THB 1,000 million and paid-up capital of THB 570 million.

Later on in 1993, the company joint-venture with a Keystone Foods Corporation (USA)
– 49.00% – McKey Food Services (Thailand) Limited (McKey).

2000-2010: – The company expansion
In 2000-2003, the Company increased its share registered capital from THB 1,000 million to THB 1,400 million and paid-up capital from THB 570 million to THB 1,253.82 million. The company also bought additional shares of Krungthai Feedmill Public Company Limited, share ownership increased from 65% to 96.5% and invested in subsidiary company.

– 96.50% – Krungthai Feedmill Public Company Limited (KT)
– 99.99% – GP Breeding Company Limited (GP)
Later on in 2008, the company joint-venture with a Nichirei Foods Inc. (Japan)
– 49.00% – GFPT Nichirei (Thailand) Company Limited (GFN)

The Company performed stock split from THB 10 per share to THB 1 per share. Therefore, the registered share capital of GFPT Public Company Limited was unchanged at 1,400 million Baht but the number of shares outstanding increased from 140 to 1,400 million shares in 2010.

2010-2015: – Recent years
The company increased its registered share capital by bought additional shares being offered amounted THB 903.56 million of GFPT Nichirei (Thailand) Company Limited to maintain its 49% share ownership. The Krungthai Feedmill Public Company Limited changed name to Krungthai Food Public Company Limited. The Company also bought additional shares of Krungthai Food Public Company Limited, the share ownership increased from 96.5% to 98.06%.

-98.06% – Krungthai Food Public Company Limited (KT)

Appendix * Management and Organizational Chart

Source: Company Annual Report
Appendix * SWOT Analysis
Strengths (S)
1.Quality Control
As GFPT is a fully vertical integrated chicken producer, it has gained the advantage from quality control. GPFT can control the quality of its product throughout the production process. In the event of Avian Flu or Bird Flu outbreaks, GFPT seems less likely to be affected by such circumstance as it has developed the close-farming system to prevent such disease. Therefore, GFPT can ensure its business continuing without any disruption.
2.Cost Control
As GFPT is a fully vertical integrated chicken producer and majority of its business transaction comes from inter-company transactions, it has gained the advantage from cost control. GPFT can control the units produced to match with potential demands in order to reduce inventory carrying cost. Thus, GFPT is able to enhance production effectiveness and efficiency.

3.Price Control
As GFPT uses its own subsidiary to be a solely distribution channel, it has gained the advantage of price control. So, GFPT has flexibility to adjust price in order to match with customers’ price elasticity and expectation while maintain certain level of margin.

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4.Expand to International Market through a Joint Venture Company
Table * Chicken Meat Exports of Thailand 2016

Source: Company IR Report
Japan is the most important market of chicken meat, GFPT has jointed venture with Nichirei Foods Inc. in order to produce and distribute processed foods and cooked chicken meats for both domestic and international markets, especially Japan. By having a Japanese firm as a business partner, it would allow GFPT to expand its market based in Japan market smoothly. Thus, GFPT Nichirei (Thailand) Co., Ltd., a joint venture company, has become one of the key exporters in the market.

Weakness (W)
1.Limited Capacity
As the demand for chicken products tends to be positive in 2017 where expected demand for domestic market is approximately 1.29 million tons and international market is approximately 0.76 million tons in 2017, GFPT currently has limited production capacity of 154,000 tons per year. Due to this fact, GFPT may lose its opportunity cost as well as market share to its competitors especially CPF.
Opportunities (O)
1.High Demand for Chicken Meat
Domestic Market
Currently, the demand for chicken meat consumption in Thailand has been increasing from time to time. There was an increase in demand at approximately 2.42% from 2015 to 2016 and is expected to increase in 2017 at approximately 2.84% from 2016 to 2017. The underlying reasons for this raising are that the price for chicken meat is rather cheaper than other meats and the nutrition of chicken meat is preferred by health-conscious consumers rather than other meats.

International Market
The demand for chicken meat consumption has been increasing by 0.48% YoY in 2016 and expected to increase by 1.18% YoY in 2017 where majority of the demand comes from USA, China, and the European Union respectively. In addition, the demand for chicken product import has been demanding aggressively by Japan at 2.03% YoY in 2016. This would allow chicken exports to enjoy the increase in price due to Demand-Supply mechanism.

2.Limited Existing Players
While the demand for chicken import in Japan is expected to increase overtime, the current production in Thailand is limited as Thailand has to serve both domestic and international market. With limited existing chicken producers in Thailand, there would be a room for chicken producers to consider business expansion.

3.The Lift of Import Ban on Thai Frozen Chicken Meat
Due to the Avian Flu outbreak in Thailand during 2004, many countries especially Japan, the European Union, and South Korea had imposed the imported of Thai chicken products. However, as Thai chicken producers has developed the system to prevent the Avian Flu and gained the confidence back from both domestic and international markets, many countries has lifted the import ban on Thai chicken products.

4.Avian Flu Outbreak in the United States
Due to the Avian Flu outbreak in the United States during December 2014, many countries imposed the chicken products from the United States allowing Brazil to be a leading exporter in the market where Thailand ranked number 4 of global chicken exporter. As a result from this incidence, Thailand is enable to increase its market of exporting chicken products worldwide.

5.Appreciation of Brazilian Real Currency against US Dollar Currency
Figure * Historical BRL/USD Exchange Rate (2012 – 2017)

Source: Trading Economic
Due to the fact that Brazil has become a leading chicken exporter, Thailand has been competing with Brazil over Japan market. Basically, Japan perceives product between Brazil and Thailand to be substitute; thus, the appreciation of Brazilian Real against US Dollar and is expected to continue in the same direction favors Thai chicken exporters due to cheaper price.

6.Less Competitive Intensity in China
China population has been increasing at the decreasing growth rate; thus, most of chicken producers are focusing on serving the domestic demand rather than international demand. It would be a great opportunity for Thai chicken exporters to gain more market share internationally.

Threats (T)
1.EU Import Quota
EU import quota allows Thailand to export cooked chicken meat products containing 25% – 57% of chicken meat at 14,000 MT per year and cooked chicken meat products containing less than 25% of chicken meat at 2,100 MT. The out-of-quota tariff is Euro 2,765/MT. Thus, Thai chicken exporters would have limited access to Europe market.

2.The Potential Increase in Corn and Oil Price
As corn is a major source of animal feed mill; thus, the potential rising in corn price tends to increase the cost of production for Thai chicken producers. In addition, the potential rising in oil price would increase the cost of production for Thai chicken producers. Thus, it would be necessary for producers to carefully monitor the trends and cost-control in order to increase their productivity and efficiency.

3.Potential of Avian Flu Outbreak
As Avian Flu is occurred directly to poultry animals, if there is an outbreak of the Avian Flu in Thailand, Thai chicken producers may be negatively affected by that circumstance.

Source: Team Analysis

Appendix * Five-Force Model Analysis

Threat of New Entrants (Low)Again, as GFPT is a fully vertical integrated chicken producer as well as there are various key players which are Charoen Pokphand Foods Pcl., Thaifoods Group Pcl., Betagro Pcl., Saha Farms Co., Ltd., Cargill Meats (Thailand) Co., Ltd., etc., it would be difficult for new players to compete with the existing players especially in perspectives of economies of scales, access to distribution channels, and customer loyalty. In addition, it also required high capital investments to compete with existing players. Therefore, with economies of scale, product differentiation, capital requirements, access to distribution channels, and customer loyalty, degree of customer switching as key determinants, the threat of new entrants tends to be LOW threat to GFPT.

Threat of Substitutes (Moderate)As chicken product is considered to be a commodity product, there are many substitute products available in the market. Even though there are moderate buyer’s switching costs, moderate perceived level of product differentiation among substitute products, high number of substitute products and ease of substitution, the current consumer behavior, preference, and price are still favorable for GFPT. Therefore, threat of substitutes tends to be MODERATE threat to GFPT.

Bargaining Power of Customers (Low)GFPT main revenue comes from chicken evisceration/processed chicken which provides fresh frozen chicken parts, cooked chicken products and by product from chicken evisceration for both domestic and international markets at 50.45% and 49.55% respectively. Most of domestic sales come from wholesalers and retailers of chicken products in which half of domestic sales are from associated companies e.g. McKey Food Services (Thailand) Limited and GFPT Nichirei (Thailand) Company Limited.
Similarly, GFPT also sells products directly to customers in international market, especially Japan and the European Union. Moreover, GFPT main competitor in Japan market are Brazilian chicken meat exporters as Japan would import chicken from Thailand if the price is lower than the price in Brazil. Luckily, due to a joint venture with Nichirei Foods Incorporation, a subsidiary of Nichirei Corporation, GFPT is being supported by Nichirei Corporation on market order in Japan and know-how.

Even though a chicken consumption tends to increase overtime due mainly to consumer preference, there are low degree of customer switching costs and high price sensitivity as chicken product is considered to be commodity goods. However, the relationship between GFPT and customers is relatively strong due to its product quality and brand image. Thus, with degree of customer switching costs and price sensitivity as key determinants, the bargaining power of consumers tends to be LOW threat to GFPT.

Bargaining Power of Suppliers (Low)As GFPT is a fully vertical integrated chicken producer, all animal feeds come from its subsidiaries companies. In this case, there is no threat to the chicken business. On the other hands, looking at the scope of a vertical integrated chicken business, the main suppliers would be mainly corn producers for animal feeds. As corn is considered to be a commodity product, degree of differentiation of corn would be low. In addition, due to limited supply of corn available in the market and limited import quota policy, GFPT would be exposed to the price volatility risk that could impact the production cost. However, there are other substitute products available in the market such as soybeans, husks, etc. For crude oil as a commodity product, the volatility in oil price would affect all players within the same industry; thus, the change in crude oil price neither benefits one over the others. All in all, with low degree of differentiation of input and high presence of substitute inputs as key determinants, the bargaining power of suppliers tends to be LOW threat to GFPT.

Industry Rivalry (Moderate)Due to the fact that chicken products are commodities, yet the demand of chicken is exceeding the supply. In addition, there is a clear market leader in the market and GFPT also has clear customer segment markets as well as a strong relationship with customers; thus, the industry rivalry tends to be MODERATE threat to GFPT.

Source: Team Analysis

Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report holds/does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report knows/does not know of the existence of any conflicts of interest that might bias the content or publication of this report. The conflict of interest is…
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:
The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.

Market making:
The author(s) does not act as a market maker in the subject company’s securities.

Ratings guide:
The author(s) rate companies as either a BUY, HOLD or SELL.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Society Name, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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