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Charoen Pokphand Food

To stumble in next two quarters HOLD

Charoen Pokphand Food Plc (CPF)

- Core business rebounds as expected

1Q14 net profit was reported at B2bn, growing 16.8%qoq and

99.7%yoy. Excluding extraordinary items (B518m extraordinary

profit from selling of investment and B106 Fx loss), 1Q14

normalized profit was B1.9bn, significantly rebounding from

normalized loss in 4Q13 thanks to the following factors: 1) Domestic

livestock business improved because pork and chicken prices rose

by 12%qoq while feed mill raw material cost was low owing to

inexpensive feed stock from late-2013, boosting profit margin.

Shrimp business still faced loss. Though shrimp farmers could deal

with EMS, small amount of shrimp business was grown and sold in

the market due to low season (unfavorable weather). 2) Overseas

business improved qoq, especially livestock business in Vietnam, as

the oversupply problem had receded. 3) Share of profit from

associated companies grown by 30%qoq, mainly from CPALL’s

increasing profit. Overall, CPF’s 1Q14 net profit made up 19% of

FY2014 earnings forecast.

- Revise down FY2014-2015 earnings forecast

We revise down CPF’s earnings forecast by 14.7% in 2014 and

12.5% in 2015. Feed mill raw material cost has been rising higher

than expected. Smaller amount of corn and soybean meal products

has been sold in the market as a result of worldwide unfavorable

weather for feed production. Corn price has leapt by 24percent from end-

2013, and soybean meal price has risen by 4%qoq. Thus, CPF would

suffer high risk as corn and soybean meal cost makes up 40% and

24% of its raw material cost, respectively. Thanks to its inexpensive

feed stock from late-2013, 1Q14 earnings result was not affected by

this negative factor. However, it would threaten CPF’s net profit in

the next two or three quarters, and 2Q14 - 4Q14 gross margin

would drop from 1Q14.

- New fair value is B28

After the down revision, new FY2014 fair value (GGM, 1.80x PBV,

15.8% long-term ROE) of B28 implies limited upside. We

recommend holding for dividend.




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