High Conviction: OSP – Solid recovery in 2023

We maintain our positive view on OSP’s market share and net profit recovery in 2023. Although 2Q23 core profit will fall YoY, importantly it will be up QoQ and head into stronger growth in 2H23, backed by a solid gross margin from better efficiency and lower average cost of goods sold and higher volume. Our call is Outperform with 2023 TP of Bt32/sh based on average PE of 35x.

Catalysts.

• Looking for a strong 2023. OSP maintains its market share goal of a gain of at least 2% by yearend. We see this as achievable, underwritten by its product variety in both the premium and standard segments. We expect market share to continue to grow in 2H23 to +/-49% by year’s end. Cost and efficiency will also steadily improve in 2H23 and on, continuing the improvement seen since 1Q23, undergirded by better production efficiency and reduction in cost of major raw materials.
• 2Q23F net profit down YoY and QoQ. We estimate 2Q23F net profit of Bt529mn (-12.3% YoY and -32% QoQ) but if we set aside the dividend from Unicharm in 1Q23, then core profit will go up 12% QoQ, backed by a 4.9% QoQ growth in revenue (down 4.4% YoY off a high base). Its energy drink market share in 2Q23 was reported at 47.5%, up from 46.6% in 1Q23 from less competition in the premium market (Bt12/bottle), backing growth in domestic energy drink sales both YoY and QoQ; sales overseas will go up YoY but soften QoQ from a seasonal stocking effect. Functional drink sales are expected to slip YoY (but grow QoQ) on lower share from investment. Gross margin is estimated to improve to 34.3% from 33.4% in 1Q23 and 31.2% in 2Q22, backed by lower cost of raw materials such as natural gas.
• Lower cost of aluminum, natural gas and electricity. In 2023, besides lower pressure from aluminum and electricity cost and less volatile natural gas price, OSP plans to enhance production efficiency by cutting cost redundancies, and in line with this, it shut down one of its seven gas burners in 1Q23, which helped widen gross margin. We believe its strategies will continue to widen gross margin.

Action & recommendation.

We maintain our 2023 net profit forecast at Bt2.78bn (+43.8% YoY) on revenue of Bt28.5bn (+4%), with average gross margin widening to 34.1% from bottom in 2022 at 30.6%. Although 3Q23F is generally a low season, we believe gross margin will show further signs of improvement and core profit will remain healthy QoQ, rising to peak in 4Q23.

Key risks Our major concerns are: 1) volatile cost of major raw materials, 2) volatility in CLM market sales volume and monetary policy.