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CP All

First among peers

CP All Plc (CPALL)

Investment thesis

CPALL remains our favorite play in the Retail sector. Its operation is more resilient to the economic slowdown and political chaos than any other retailer we cover. Moreover, the worst has already passed—earnings bottomed out in 4Q13, we believe. Despite the prevailing weak consumption environment, we expect CPALL to resume strong earnings growth in 2Q14, driven by aggressive expansion and synergy-building with MAKRO. At first glance the current FY14 PER of 25.9x might look expensive, but it is justified by a three-year earnings CAGR profile of 27%, we believe. Our BUY rating stands with a YE14 target price of Bt46.

Still expanding aggressively, despite weak consumption climate

CPALL is one of only a few retailers under our coverage to maintain an aggressive expansion plan (one of the others is its subsidiary, MAKRO). Last year, the company opened 607 new outlets, up from 546 new stores in FY12. Going forward, CPALL plans to roll out 600 new 7-Eleven braches a year and targets having 10,000 by YE18. Moreover, it intends to build more food production facilities and distribution centers across the nation in order to offer a greater range of fat-margin, high-turnover chilled food items at all stores.

Synergistic benefits to manifest soon

Management said that synergies built from integrating MAKRO will start to manifest in the 1Q14 numbers. The benefits will initially be modest, but they will rise incrementally in each quarterly statement of accounts this year. CPALL guides for a 20 bps increase in GM on a full-year basis, implying that GM is likely to expand more than 20 bps in 2H14 and more again in FY15. Note that we have yet to factor the synergistic benefits into our model. Based on our sensitivity analysis, every 10 bps rise in GM would boost earnings by 2.6% in excess of our current forecast.

Refinancing plan update

CPALL plans to refinance the remaining bridging loan of US$5.77bn with Bt40bn in debentures and bank loans of about Bt90bn. The debentures are expected to be issued in March, while the firm should secure long-term credit facilities with banks—mostly denominated in baht—by June. The average coupon for this round of debentures is likely to be 10-30bps lower than the 4.8% coupon for the Bt50bn in fixed-income securities issued in October 2013, thanks to a lower market yield (see coupons for each tenor of debentures in Figure 1). With regard to the bank loans, we assume a mean interest rate of 5.375%, pegged to MLR -1.5%.

In the future, the company plans to reduce finance costs further by refinancing all its bank loans—starting with US dollar-denominated debts—with baht-denominated debentures that cost less to service.

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