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Chareon Pokphand Foods

2Q14F: Livestock and overseas businesses starred BUY

Chareon Pokphand Foods Plc (CPF)

- 2Q14F core profit of Bt2.5bn, followed by strong turnaround in 2H14

- Livestock and Vietnam businesses starred in 2Q14

- Shrimp still poor in 1H14, but recovery coming in 2H14

- Maintain BUY, target price Bt35


2Q14F net profit expected at Bt2.8bn with core profit of Bt2.5bn, far better than the 2Q13 loss of Bt1.5bn and a 37%QoQ rise from Bt1.9bn. Sales are estimated at Bt101bn, +9%YoY and +4%QoQ. Gross margin should continue to show last quarter's strength at 13.4% with net margin improving to 2.5percent from 1.9% thanks to overseas operations. Domestic swine price reached an all time high in 2Q14 at Bt80/kg,+8%QoQ and domestic broiler price continued good at Bt41/kg, -4%QoQ. Broiler export volume continued to grow after resuming exports to Japan in 1Q14. Shrimp remains troubled, with recovery slower than expected; we now do not expect it to be in the black until October 2014. Overseas businesses did better, especially Vietnam, Turkey and Russia. We estimate equity sharing from CPALL, CP Cambodia and CP-Meiji at Bt1.24bn.

Swine and broiler businesses to stay sweet for the rest of 2014. Swine is doing well, both at home and overseas, especially in Vietnam and Russia. We expect to see a strong recovery in is Vietnam business, under CPP (Hong Kong), in which CPF holds 71%. In Russia, the takeover of Russia Baltic Pork Invest ASA (2RBPI3) helped dilute the 1H14 losses from CPF's existing swine business in Russia and we expect this area to show a net profit of Bt200mn in 2014 after last year's loss of Bt600mn loss. Turkey also did better in 1H14, reaching breakeven (zero profit both in 1Q14 and 2Q14) up from the Bt1.1bn losses in 2013; we expect losses to shrink to Bt600mn in 2014.

Shrimp business still poor in 1H14, now expecting recovery in late 2H14. Shrimp is a disappointment. Though EMS is still present, operators have learned to work around it - and in fact a recent report shows a large survival rate in Prachuab Kiri Khan - but this year's shrimp harvest, expected in August, was delayed by the unusually cool weather early in the year. Harvest is now expected in October. We estimate a loss of ~Bt700mn from its shrimp business in 2Q14, better than the almost Bt1bn in 1Q14, with a gross margin of -7.5% and operating margin of -16.3%.

Recommend BUY and maintain target price of Bt35. Net profit in 1H14 will show some gradual recovery, with the strong turnaround in livestock and overseas operations held back by shrimp. In 2014, business in China is expected to remain strong and contribute the bulk of overseas operations. In Vietnam, margin has improved and in Russia and Turkey losses will be lower than earlier feared. All told, overseas business is expected to contribute ~Bt5.3bn: Bt5.6bn from CPP (Hong Kong). It will also book an estimated Bt4.1bn from CPALL, to bring earnings to reach our estimate of Bt13bn in 2014. We BUY with a target price of Bt35 (based on 2x mid-2015 P/BV.).




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