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CPALL

Treading a firmer upwards path from 2H14 BUY

CPALL Plc

We expect CPALL to deliver the sector's highest 2-year EPS growth of

27% as expenses related to the acquisition of MAKRO slim down and it

is able to claim greater synergy with MAKRO. CPALL will also have the

sector's lowest 2-year PEG of 1.2x. Earnings momentum will improve

from 2H14. We maintain BUY with mid-15 DCF PT at Bt58.

Maintain BUY with a new DCF PT of Bt58, rolling over to mid-2015 from Bt51 at

end-2014. CPALL is trading at 33x 2014PE, equivalent to +0.75SD of its historical 5-year

PE. CPALL is positioned to deliver the sector's best 2-year EPS growth of 27%. Behind

this is lower expenses from the acquisition of MAKRO and greater business synergy

with MAKRO. Earnings will begin to show real improvement from 2H14 as SSS growth

improves from more normal weather patterns, lower acquisition expenses and

upcoming synergy. CPALL will also have the sector's lowest 2-year PEG at 1.2x.

Resilient SSS growth amid continued store expansion. We estimate 2014 SSS

growth of 4% (vs. 5.7% in 2013), partly due to the unusually long cool season that ate

into cold beverage sales (30% of sales) in early 2014. The impact on SSS growth from

the economic slowdown is thought to be negligible. SSS growth has been quite strong

at 8.5% over the past seven years through all the bumps and turns of the economy and

politics. It will continue to expand rapidly, adding 600 stores/year, more than the 2013

expansion target of 500-550. This will give it 8,029 stores at the end of 2014.

EBIT margin to expand to 7.1% in 2014 and 7.7% in 2015 from 5.7% in 2013. Apart

from lower fees related to the acquisition of MAKRO, margin will be given a boost by

organic gross margin expansion of +20bps/year brought by a greater focus on highmargin

food products and inorganic expansion from business synergy of 15-20 bps for

CPALL and 10-15bps for MAKRO in 2014-15. This includes joining forces with MAKRO to

negotiate with suppliers and sharing services such as logistics, raw material sourcing

within the group, HR and the development of product cross-selling.

Completed debt refinancing of the one-year US$ bridging loan for the acquisition of

MAKRO (Bt183bn) to LT liabilities. The refinancing consists of: 1) a Bt50bn bahtdenominated

bond in Oct 2013 and another Bt40bn bond in March 2014 (average tenor

of seven years, fixed rate at 4.8%); and 2) baht-denominated LT loan of Bt82bn and

unhedged US$ LT loan of Bt11bn (US$350mn) in March 2014 (average tenor of 2-6

years, floating rate). It estimates all-in costs (fees and interest expenses) at ~5.5% post

refinancing in 2014, with fees related to this transaction to be booked in 1H14. CPALL

plans to issue more baht bonds to refinance the LT loans to lock in a more favorable

rate during the downward trend and to close its FX exposure.

Deleveraging on course. Backed by operational improvement, we expect CPALL's net

debt/EBITDA to come down to below 3x in 2016F from 8x in 2013 and net DE to fall to

below 2x in 2017 from 6x in 2013, in line with its target.


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