KTBST Recommends “BUY” OSP at ฿40/Share from Long Term Growth and Premiumization Strategy

KTB Securities (KTBST) recommend “BUY” Osotspa Public Company Limited (OSP) share with the target price of ฿40.00/share which is pegged to 2020E PER of 30.2x.

KTBST are increasingly positive about OSP’s earnings outlook following OSP’s bullish guidance at a luncheon meeting held yesterday. OSP’s management foresees room to grow both locally and internationally and thus formulates a product premiumization strategy to expand its customer base to white-collar and athletes groups. New products will focus on adding value, which will allow OSP to increase the price per milliliter.  Moreover, OSP will also invest in vending machines as a part of its strategy to increase distribution channel given a high growth potential, as Thailand vending machine market can support up to 500,000 machines while there are currently 20,000. OSP also casts a spotlight on personal care products, which focuses on the premium segment and increasing distribution channels. Revenue of OSP’s personal care section accounted for 9% of OSP’s total revenue or THB 2.4 billion of Thailand’s market value of THB 150 billion. Additionally, OSP will invest in vending machines to boost sales and pursues its cost-cutting program “Fit Fast Firm”, as well as an increase in the effectiveness of its distribution and warehouse system.

The share price has surged 36% over the past six months but KTBST sees the stock extending its rallies given its promising growth outlook in the foreseeable future with an estimated net profit CAGR of 13.5% in 2019E-21E. OSP said its domestic energy drink sales have trended up over the past three quarters with M-150 and herbal energy drink as a key growth driver. OSP’s market share for energy drinks increased to 54.1% of Thailand’s energy drink market with market share for M-150 rising to 38.1% in July from 37.8% in 2Q19. This was resulted by OSP’s loyalty program related to stamp collection through Line application, which welcomed 2.3 million subscribers over the past three months. OSP also has a plan to launch 1-2 SKUs of functional drink “NPD” in 4Q19E to capture more shares in the functional drink market.

KTBST  maintain the 2019E core profit forecast of THB 3.4 billion, which represents a growth of +13% YoY because KTBST expects 2H19E core profit to grow +24% YoY on rising domestic energy drink market and C-Vitt sales to grow +20% YoY following a debottlenecking in 2Q19, and the gross profit margin would widen further from additional capacity of 15% in its bottle manufacturing plant SGA, starting in mid-August, the cost-cutting program Fit Fast Firm, an increase in distribution and warehouse system to occur in 4Q19E and robotic process automation (RPA) in accounting. KTBST expects OSP to benefit from its Fit Fast Firm for the entire year in 2020E.

KTBST full-year forecast is based on assumptions below:
1) The domestic energy drink sales will grow +5% YoY on the operation of its furnace for the entire year and new production capacity of its SGA from late 3Q19E.
2) revenue from supply chain will improve +10% YoY.
3) revenue from personal care will rise +9% YoY; 4) overseas revenue will increase +13% YoY.
5) gross profit margin will widen further on a lower cost of cullet for the entire year, its cost-cutting program and an increase in effectiveness in distribution and warehouse system.
6) OSP will become net cash position given debt repayment with the proceeds from IPO.