Mixed pickings on the menu

Food firms relying on domestic market seen to have better immediate prospects

Somporn Thapanachai

Better prospects for expanded domestic consumption are likely to drive the food and beverage sector this year, but shares of listed companies in the group still remain unattractive to investors, except for those of Thai Union Frozen Products (TUF) and the Minor Food Group (MFG).

Total market capitalisation for the 21-company sector as of June 30 this year was 41.9 billion baht. The average return over one year was 33.3%, compared with 12.9% over five years.

TUF, accounting for 38% of the sector's market capitalisation, delivered a one-year TSR of 35%, and has yielded 63% over five years.

Thai Pineapple Plc (Tipco) ranked first with a 163% return in the 12 months to June 30, followed by Food and Drink Plc at 154%. Trailing the field was S&P Syndicate at -35%, though its five-year performance of 30% is well above the sector average.

Manufacturers in the sector believe that companies relying more on the domestic market would profit as the Thai economic outlook was improving, with growth of 3-5% expected this year.

However, the future of companies depending more on the exports will hinge on the global economy. These companies must also closely monitor the exchange rate as the baht has strengthened significantly this year. Critically, they must be able to hedge against the exchange-rate risk.

Companies with no secured markets abroad will face more difficulty marketing their products, as tougher competition and the stronger baht make Thai products less competitive than those of countries in Latin America.

Lack of trading liquidity is a problem facing investors interested in the food and beverages sector. Most investors who already hold shares in the group prefer long-term investment, consequently no brokerages devote time to analysing the whole sector.

Brokers normally look at TUF, a high-profile stock, as the firm is now the biggest exporter of canned tuna in Thailand and it has biggest market capitalisation in the sector, at 15 billion baht.

An analyst at KGI Securities (Thailand) said TUF would have a better performance in the second half of this year due to improved tuna prices and the company's policy of hedging against exchange-rate fluctuations.

TUF and its subsidiaries generated a net profit of 574.8 million baht and retained earnings of 3.66 billion baht during the first six months of this year. The profit dropped 27% from 787.6 million in first half of last year.

TUF also announced a new policy of paying dividends twice a year, beginning from this year onward, as TUF wants to give more returns to shareholders.

Analysts also follow MFG, whose one-year return to shareholders was 15%, because the group has returned this year to an expansion mode domestically and plans to go abroad later, but questions arise about whether its growth would be sustainable. As well, the company's five-year return has been -17%, a consequence of its rapid and costly expansion among other factors.

The group operates fast-food chains including The Pizza Company, Swensen's, Sizzler, Dairy Queen and Burger King. It posted a net profit of 50.96 million baht in the first half this year, compared with a loss of 223.98 million in the first-half of 2001.

Although S&P Syndicate Plc, a bakery and restaurant operator, had fared poorly over the past year, analysts recommended the company due to its investment in a new factory and expansion of new product lines.

Kuang Pei San Plc, which produces canned fish under the Pompui brand, had a one-year return of -23%. A company executive said the firm did not receive much attention because of its negative result of 62.99 million baht in the first half of this year.

The company faces a large interest burden and is in the process of restructuring its debt, which is scheduled to be completed at the end of this year.

The executive said the outlook was favourable as people tended to consume better food when the economy improved. _Somporn Thapanachai

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