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Charoen Pokphand Foods

FY14 earnings recovery play

Charoen Pokphand Foods Plc (CPF)

Investment thesis

We have upgraded our CPF rating from TRADING BUY to BUY, as we are now fully confident that its shrimp unit will turn around and overseas operations will improve in 2H14. Livestock meat margin will fatten on sustained high livestock meat prices and a lower soybean meal price.

Shallower YoY core loss expected for 4Q13

We estimate a Bt700m net profit for 4Q13, up 194% YoY but down 74% QoQ. Excluding FX and a gain from trading CPALL shares, we model for a Bt200m core loss, shallower by 88% YoY (but a reversal from the Bt1.71bn core profit reported for 3Q13). The expected YoY jump in the core number is due to shallower losses for the shrimp, Turkish and Indian units and fatter domestic livestock meat margins. The assumed QoQ drop is because of low season for exports and aquaculture, a slimmer domestic livestock margin and a decline in equity income from CPALL.

We estimate the shrimp unit's loss at Bt1bn against a Bt1.6bn loss in 3Q13. Five overseas operations—India, Malaysia, Turkey, Russia and Philippines—should report losses (as in 3Q13). Vietnam will post a QoQ profit rise, led by a livestock price recovery. The mean 4Q13 chicken price rose 4% YoY but fell 12% QoQ. The mean pork price jumped 27% YoY but dipped 3% QoQ. The corn price dived by 24% YoY and 16% QoQ. The SBM price was stable YoY but up 15% QoQ.

Shrimp unit to break even by mid-year

The unusually cool weather in 1Q14-to-date may result in lower shrimp output than earlier expected (the first-quarter is also low season for shrimp output). Hence, shrimp unit numbers may not improve much in 1Q14. We expect the shrimp unit to break even in late 2Q14, led by greater productivity; the numbers will gradually improve during FY14.

The recent spikes in chicken and pork prices were led by supply shortfalls caused by livestock illnesses that were exacerbated by the cold weather. We expect fatter livestock margins during this year, driven by sustained high livestock prices and lower SBM costs. Numbers at the Malaysian, Indian, Vietnamese and Turkish units will rise HoH in 2H14, led by the easing of oversupply issues in those markets. CPF guides for 10-15percent sales growth and 13% GM for FY14.

Target price upped by 19%

We have revised up our net profit forecast by 28percent for FY14, which factors in new assumptions for the prices of corn (down from Bt9.5/kg to Bt8/kg) and pork (up from Bt68/kg to Bt70/kg) and much better shrimp numbers in FY14 (from a Bt1bn loss to break-even). Our YE14 DDM-derived target price rises to Bt39 from Bt32.70.






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