High costs hit food companies

PITSINEE JITPLEECHEEP & KRISSANA PARNSOONTHORN

Food and beverage companies are set to take a profit hit this year from skyrocketing fuel and farm product prices and higher labour costs. But many companies, particularly restaurant operators, have been unable to increase prices due to lower consumer spending, say analysts.

Nattapong Sithikul, an analyst at Sicco Securities, said rising oil prices were only one of the many big problems facing food producers.

"Excluding the oil factor, the shortage of some farm products is another concern due mainly to the impact of global warming and an increase in commodity prices," he said.

But the food and beverage sector is not the only area feeling the squeeze, and one industry executive said that the impact on food and beverage companies was not that bad.

"The sector is still better off than other sectors such as fashion. Consumers tend to cut their spending on non-essential products when they have limited money in their pockets," he said.

Analysts said investors tended to be underweight in the food sector as many food and beverage stocks are illiquid. They are perceived as dividend stocks that appeal to long-term investors.

The sector, with market capitalisation of 142.25 billion baht, recorded a one-year total shareholder return (TSR) of 34.94% in 2007 while its three-year TSR stood at 49.27%, five-year 39.70% and 10-year at 31.44%.

Thai Vegetable Oil Plc (TVO), capitalised at 8.43 billion baht, was the best performer with a 125.67% TSR, followed by Minor International (MINT) at 54.97%, and Lam Soon (Thailand) at 45.46%.

The three worst performers were S. Khonkaen Food Industry Plc, with a TSR at -22.13.%, Haad Thip at -21.49% and Tropical Canning (Thailand) at -6.45%.

Mr Nattapong said TVO would continue to outperform its peers in 2008, and was building stockpiles and purchasing soybeans from international sources at good prices even as global soybean prices are rising sharply. This also translates into high gross profit margins.

"Demand for soybeans and related products such as cooking oil remains strong while supply is short," he said.

TVO is now considering lifting production capacity by an additional 2,000 tonnes per day but it has not finalised details of the source of funds. If the plan is concluded, the new facilities would be finished by 2010.

This year, its revenues are projected to rise by 30% to 23.63 billion baht.

Prapharat Tangkawattana, senior finance director of MINT, said the implementation of key performance indicators (KPI) had helped the company's earnings grow by 40% in the past three years. The earnings are still stable because the company has a clear business focus.

MINT has two business units -  food and restaurants, and hotels. Its food brands include The Pizza Company, Sizzler, Swensen's, Burger King and Dairy Queen. It also has 19 hotels with more than 2,700 rooms.

"We have diversified our product portfolios and markets to help minimise business risks. For example, when the market in US has a problem, we still gain from European customers," Ms Prapharat said.

Pratana Manomaiphiboon, chief financial officer of MINT, said the company had been approached by many investors about deals.

"We can manage to grow our earnings by 20% every year. Our food business keeps growing and the hotel unit is a high-return operation as we have managed hotels for outsiders as well. We have no carrying costs for a land bank," Mrs Pratana said.

Charoen Rujirasopon, the chief executive officer of S. Khonkaen Food Industry Plc, a producer of Thai-style sausages and dried, shredded pork, said his company's return to shareholders this year would improve because its sales in the first four months showed signs of improvement.

"Small food manufacturers gradually closed after facing higher operating costs and the strong baht. This paves the way for big food suppliers to grow and take advantage," he said.

The company will introduce higher value-added products to help raise sales and profit. It plans to launch two new brands of Thai and Chinese-style, ready-to-eat meals available through delivery.

"The growing trend toward the closure of small food shops in the city and higher fuel prices have forced people to adjust and eat more at home or at the office, resulting in growing demand for food delivery services," Mr Charoen said.