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CPALL

2Q14F slow but looking very good from 3Q14F BUY

CPALL Plc

2Q14F weak with net profit of Bt2.3bn, -14% YoY and -16% QoQ. The YoY slip reflects interest expenses and fees related to the acquisition of MAKRO, outpacing the only moderate sales growth. The QoQ drop is seasonal. Sales growth is underwritten by 8% YoY expansion in number of stores and 2.8percent SSS growth (+7.6% in 2Q13 and -1.1% in 1Q14). The slight improvement in SSS growth is provided by improved beverage sales after Thailand returned to its usual hot weather (unusually chilly in 1Q14), though there was some small adverse effect from the curfew over 22 May-13 June. The Bt2.3bn consolidated profit also includes Bt1.2bn from MAKRO (98% holding, fully consolidated since 3Q13). It will release results on 6 August 2014.

3Q14F new high and sector's best. CPALL is ready to lead the pack from 3Q14 with profit achieving a new record, backed by the revival of SSS growth, margin expansion, and no more costs from the MAKRO acquisition. SSS growth will be fuelled by another run of its wildly popular stamp promotion from late July to November 2014, better consumer sentiment, and off a low base from the economic slowdown in mid-2013 and politics from Nov 2013. Margin will continue to expand upon a better product mix and business synergy with MAKRO, mainly in terms of joint negotiations with suppliers.

Upside from faster-than-expected deleveraging. CPALL has completed refinancing of the one-year US$ bridging loan for the acquisition of MAKRO (Bt183bn) to LT liabilities: 50percent fixed-rate THB bond with tenor of 3-10 years and 50percent floating-rate THB and US$ loans with tenor of 2-6 years. On operational improvement alone, we estimate CPALL will be able to repay the LT liabilities in 10 years based on an average effective interest rate of 5.3%. There would be upside to our forecasts if it deleverages more rapidly than we expect. We ran a sensitivity analysis which indicates that each repayment of Bt10bn (5.5%) in principal of its LT liabilities would reduce interest expenses and raise our earnings by 3%.

Maintain BUY with mid-15 DCF PT at Bt58. We expect CPALL to deliver the sector's highest 2-year EPS growth of 27%, backed by the recovery of SSS growth and margin enhancement from operational improvement, synergy with MAKRO and elimination of expenses related to the acquisition of MAKRO. The new high for earnings will start to be seen from 3Q14F. Key risks include: 1) changes in SSS growth; 2) execution of store expansion; 3) changes in staff and utilities expenses; 4) negotiations with suppliers regarding rebates; 5) competition.




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