Export Capacity Expansion And Cost Advantages Will Drive Long Term Earnings Power

Catalysts

About GFPT

GFPT is a vertically integrated Thai poultry producer and exporter focused on chicken meat and value added processed products.

What are the underlying business or industry changes driving this perspective?

• Ongoing capacity expansion in broiler farms, primary plants and further processing facilities is set to lift export volumes of higher value products, supporting top line growth and operating leverage that should enhance earnings.
• Structural cost advantages from lower local feed ingredient prices, more efficient feed mills and scale benefits across a fully integrated chain should keep cost of goods sold lower as a share of sales, sustaining improved gross margins and net profit.
• Rising global demand for affordable animal protein and ready to eat poultry in key markets such as Japan, the U.K., EU and China positions GFPT, as Thailand’s number two chicken exporter, to capture greater export share and diversify revenue mix toward higher margin cooked products.
• Investment in new slaughterhouse and processing capacity for joint ventures such as McKey and GFN should gradually restore and grow associate profits after recent volume and price headwinds, adding a second leg to earnings growth beyond the standalone business.
• A strengthening balance sheet with low debt, rising cash and disciplined CapEx enables GFPT to fund expansion, navigate commodity volatility and potentially increase dividends over time, supporting sustainable earnings and improvements in return on equity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming GFPT's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.4% today to 12.1% in 3 years time.
• Analysts expect earnings to reach THB 2.6 billion (and earnings per share of THB 2.09) by about December 2028, up from THB 2.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting THB2.9 billion in earnings, and the most bearish expecting THB2.3 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.2x on those 2028 earnings, up from 5.2x today. This future PE is lower than the current PE for the TH Food industry at 11.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• GFPT’s recent improvement in gross profit margin and net profit margin is heavily driven by unusually low feed input costs for corn, soybean meal and fish meal, so a long term reversal in commodity prices due to weather events such as El Nino and La Nina or geopolitical disruptions in grain supply chains could compress margins and reduce earnings.
• The company is expanding broiler and processing capacity in an industry where Thai exports are already at record highs and management acknowledges oversupply risk. If global demand growth slows or competitors in Brazil and the U.S. keep adding low cost capacity, export prices and volumes could fall and pressure revenue and net profit.
• GFPT’s growth strategy relies on exports to a concentrated set of developed markets that increasingly impose strict non tariff barriers related to labor, animal welfare and environmental standards. Any tightening of import rules or carbon related costs could erode Thailand’s cost advantage and hurt export revenue and operating margins.
• The group’s earnings are meaningfully supported by joint ventures such as McKey and GFN, yet recent results show sharp profit declines from these associates due to weaker processed chicken volumes and prices. A prolonged downturn in QSR demand or shift in customer sourcing could structurally reduce associate income and group earnings.
• Management is committing significant capital expenditure over the next three to five years to expand farms and processing plants while guiding for flat top line revenue in the near term. If demand or pricing does not keep pace with added capacity, returns on invested capital and future earnings growth could fall below expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of THB13.77 for GFPT based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB15.5, and the most bearish reporting a price target of just THB12.2.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be THB21.6 billion, earnings will come to THB2.6 billion, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of THB9.9, the analyst price target of THB13.77 is 28.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.