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CPALL

To rebound in the remainder of 2014

CPALL Plc

- 1Q14 profit below expectation due to cost on MAKRO acquisition

1Q14 net profit was reported at B2,705m, growing 32%qoq but falling 15%yoy

(4% below expectation) as a result of the following factors: 1) B2.2-2.4bn

(B186bn loan debt) financial cost from MAKRO acquisition, or 5%-5.5percent financial

cost (higher than expected at 5.16%), was booked as SG&A and financial

expense. This was partially negated by B1.2bn profit from MAKRO. 2) As a result

of abnormally cold weather, same store sales dropped by 1.1%yoy (first time in

many years; due to fewer tickets). However, thanks to the opening of 610 new

branches (yoy), overall sales volume (excluding MAKRO) grew by 7.7%yoy. Also,

gross margin (excluding MAKRO) rose by 30bps to 25.7%.

CPALL has sold the bond at B40bn with the average interest rate of 4.7% (B50bn

bond was issued in 1Q14) in order to refinance from short-term USD loan

issuance of B130bn into long-term THB loan issuance of B81.9bn and USD loan

issuance of US$350m. As a result, USD loan issuance has made up only 6% of

CPALL’s total loan, substantially subsidizing Fx loss.

- To rebound from now on

We maintain our FY2014 earnings forecast. Though 1Q14 net profit made up only

20% of the forecast, we project that CPALL has passed its lowest in 1Q14, likely

to recovery from now on. 2Q14 net profit is expected to grow qoq and yoy. Same

store sales would rebound and grow again; the weather has become hot again in

April, and the World Cup (June 12 - July 13) would promote food and beverage

sales volume. After CPALL has already recognized financial cost before tax from

MAKRO acquisition at the average of B600-800m/quarter for three months, lower

financial cost (excluding interest) is expected to be booked as SG&A from now on,

thus promoting CPALL’s gross margin. Also, 2H14 net profit is likely to leap

remarkably yoy; profit base was weak in 2H13 as a result of expenses on the

acquisition of MAKRO.

- Share price to drop for short term. Good entry point

Share price is likely to drop due to weaker-than-expected 1Q14 earnings result.

As CPALL is likely to rebound for the remainder of the year, we recommend

buying. CPALL’s fair value (DCF, 9.5% WACC, 2.4% TV Growth) is B50.




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