• Expect earnings to be flat qoq in 3Q18F due to extended shortage of raw material; cut FY18F profit by 15% after reflecting slow 3Q profit
• Earnings should recover qoq in 4Q18F led by higher sales volumes and GPM; TWPC estimates 2019 tapioca harvest will grow 16% yoy
• NEUTRAL, Bt9 TP is based on 14x FY19F PE; wait for share price to pull back to Bt8/sh level (-0.5SD of historical multiple)  

Cut FY18F profit by 15% in anticipation of weaker 3Q earnings

We estimate 3Q18F earnings will be at Bt47m, flat qoq but -57% yoy, the sharp yoy drop due to weaker sales volume of native starch (-50% yoy) and gross margin (16.8% in 3Q18F vs 22.8% in 3Q17) caused by tight domestic tapioca supply this year (-20% yoy). Utilization should remain low at c.30% vs 60% in 3Q17 as TWPC only ramped up utilization in September, during harvest season. Its subsidiary, TDC, might book a loss again (vs Bt2m loss in 2Q18) because of under-utilization and forex losses. Food unit sales should grow 5% yoy led by more SKUs and larger distribution coverage. We cut FY18F profit by 15% to Bt297m (Bt0.34/sh) after reducing 3Q earnings by c.Bt100m.

Turnaround at the corner

TWPC’s utilization rate should recover to normal levels of 50-60% in 4Q18 due to larger supply as tapioca prices had risen 60% yoy to Bt2.80/kg in 9M18 and surpassed farmers’ production cost of Bt2/kg. Our channel check reveals tapioca production would grow by 16% yoy in FY19F led by larger planted area and better crop yield. Given higher utilization rate and wider starch-tapioca spreads (+4% qoq), we estimate GPM will recover to 20-21% in 4Q18F. TDC, could turn profitable in 4Q18 (Bt10m/quarter profit in the past) led by higher utilization and after adjusting from 6-month to 3-month fixed price contracts.

NEUTRAL, TP Bt9/sh; 4% dividend yield to limit downside

Our SOTP TP is based on 14x FY19F PE, Bt0.55/sh for land assets (Bt485m based on third-party appraisal) and Bt125m for 3.5m shares in Laguna Resort Hotel. We expect the share price to pull back following weak 3Q18 results and recommend to accumulate the stock at Bt8/sh level (-0.5SD of historical multiple) to capture earnings turnaround in FY19F (+74% yoy). We expect DPS to increase to Bt0.33/sh in FY18F from Bt0.32 last year, given higher absolute dividend policy. This implies 4% dividend yield.