Charoen Pokphand Foods

Recovery story now playing out

Charoen Pokphand Foods Plc (CPF)

Investment thesis

Following the recent analyst meeting, we now expect weaker 4Q12 earnings than we did previously, due to poor numbers at the shrimp operation. However, we think the market has already priced in a subdued bottom-line. Now is a good time to start accumulating the stock ahead of a gradual 1H13 recovery, followed by much stronger 2H13 numbers, led by bounces in meat prices across Thailand and overseas units. We have switched our Food sector preferences from TUF to CPF and GFPT in anticipation that the two firms will deliver robust FY13 earnings recoveries.

Weaker 4Q12 earnings now expected

We estimate a Bt1.45bn 4Q12 net profit, down by 33% YoY and 40% QoQ. Stripping out an FX and gain from trading CPALL shares, core profit would be Bt488m, down by 61% YoY and 70% QoQ and much lower than our previous core estimate for the quarter of Bt1.5bn. The core profit deterioration is because of weaker domestic farm operations—chicken, pork and shrimp—and deeper QoQ losses in Turkey and Malaysia. The Indian operation will post flattish QoQ numbers. Only two overseas units—China and Vietnam—are expected to report QoQ profit rises, which will be modest.

Shrimp operation to recover in 2H13

CPF's shrimp operation was hit by an outbreak of Early Mortality Syndrome (EMS) disease in late 3Q12 and the situation worsened in 4Q12. About 15-20% of its shrimp farms were affected by the EMS outbreak. As such, CPF's shrimp margin will be squeezed in 4Q12—lower shrimp output in the face of high medical costs, while shrimp feed sales will have declined because of diminished shrimp farming. We expect shrimp production and sales volume to resume normal levels in 2H13.

Meat price bounces ahead of Chinese New Year

The domestic chicken price rose to a high for 2012 of Bt46/kg in late Dec, up 41percent from its nadir of Bt32/kg in Oct (it has since retreated 9% YTD to Bt42/kg). The pork price stood at Bt67/kg on Jan 22, up 26percent from its low of Bt53/kg in October 2012. We attribute the rebounds to: 1) diminished meat supplies, 2) raw material cost-push effects and 3) demand recoveries during the festive season. We expect meat prices to rise again as Chinese New Year approaches in February. CPF's chicken and pork operations are currently both profitable, given the prevailing good farmgate prices.