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Charoen Pokphand Foods

CB issuance to reduce cost of debt

Charoen Pokphand Foods Plc (CPF)

Investment thesis

What's new?

CP Foods Holdings Ltd (CPFH), a wholly-owned subsidiary of CPF, will issue US$290.4m in convertible bonds (CBs) with a 0.5% coupon rate to foreign investors (but investors that hold the bonds to maturity will get a coupon of 2.75%). The CBs will trade on the Singapore bond market, starting Jan 17, 2014 and will mature in 2019.

CB holders will have the following three options: 1) converting the CBs into CPALL shares (CPF/CPFH currently holds a 32percent stake in CPALL), 2) retiring the CBs from CPFH two years after issuance or 3) holding the bonds till maturity. Under options 2 and 3, CPFH will pay cash. Under option 1, where CB holders convert the bonds into CPALL shares, CPFH may pay the CB holders in cash (equal to the value of CPALL shares) or deliver CPALL shares. The CBs have an implied conversion price of Bt53.30 for one CPALL share, equal to 130% of the January 9 close price of the stock.

There was also unrelated news that CPF Europe SA, a wholly-owned CPF subsidiary, will buy 80% of Tops Foods NV (Tops Foods), which is headquartered in Belgium, for €9m (Bt408m). Tops Foods makes and distributes chilled and ready-to-eat meals.

Features of CB

Based on the Bt53.3 conversion value, CPF will allocate 180m CPALL shares (6.3% of CPALL's outstanding shares), which will effectively slice a 6.3percent stake in CPALL from its 32% holding. The low initial coupon means that the cost of the bond is back-loaded. The firm confirmed that the CBs will be issued at face value.

Expected decline in interest expenses

CPF is refinancing existing debt with the CBs, which will cut its interest expenses, boosting profitability. Its 9M13 average cost of debt was 4.48%. Assuming the worst-case scenario where CB holders retire the CBs from CPFH at the maturity date, the effective annual coupon would be 2.75%. But even under that scenario, CPF would save about 175 bps in interest costs, or Bt160m per annum (not taking FX risk into account). Ignoring FX risk, our net profit forecasts would be boosted by 1.6percent for FY14 and by 1.3percent for FY15 and our YE14 target price would rise 2% to Bt32.70.

Negligible financial impact from the purchase of Tops Foods

We project that CPF's 80percent stake in Tops Foods will initially contribute only Bt440m in annual sales to it, equal to about 0.1% of its FY14 sales. But it marks a new footprint in Europe for ready-to-eat meals revenue, which comprised 1.2% of 9M13 consolidated sales.

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