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Charoen Pokphand Foods

Selling part of CPP stake to trim debt

Charoen Pokphand Foods Plc (CPF)

What's new?

On July 24, 2014 CPF and CPF Investment Ltd agreed to sell 6,018m

ordinary shares of CP Pokphand Co Ltd (CPP) to Itochu Corporation at

a price of HK$1.10/share—total consideration of HK$6,620m

(Bt27,397m). Following the share sale, CPF and CPFI will hold 50.43%

of the shares in CPP (down from 74.18%) and ITOCHU will hold

23.8%. The transaction is expected to be completed in Sept 2014.

Net neutral impact on income statement but …

The sale proceeds will be used to pay down debt. Assuming an

average cost of debt of 4.9% in FY13 and that the entire Bt27bn in

proceeds are used to repay debt, we estimate that interest expenses

would decline by Bt1,345m per annum. With CPF's equity stake in CPP

downsized to 50.43% and estimated annual CPP earnings of Bt5.7bn,

we estimate that CPF's yearly profit would decline by Bt1,348m. That

makes for a net neutral impact on CPF's bottom-line, which we have

modeled into our forecasts.

…. positive impact on balance sheet—lower gearing

Assuming a Bt27bn debt reduction (all the proceeds are used to pay

down debt), we estimate that interest-bearing debt would decline 14%

from Bt196bn at end-March to Bt168bn at end-Sept 2014. The interestbearing

debt/equity ratio would fall from 1.77x at end-March to 1.3x at

end-Sept. We estimate that the D/E ratio would drop further to 0.9x at

YE15.

Gain from sale might boost future dividend payout

Based on CPF's cost of CPP shares at HK$0.90 apiece and its sale of

the shares at HK$1.1 apiece, we roughly estimate a Bt4.98bn pre-tax

gain and a Bt4n after-tax gain. Management told us that CPF will

continue to consolidate CPP into its income statement following the

share sell-down—the auditor won't allow the firm to book the gain to the

consolidated income statement, but will allow it to book it to the

unconsolidated statement. CPF usually pays its dividend from

unconsolidated EPS. Based on a 56% payout ratio for FY13, the firm

may pay an additional DPS of Bt0.52 (scope for upside to next year's

dividend payout).

Possible business-building with Itochu?

Itochu is a Japanese trading house engaged in a range of industries,

including food and retail. CPP and Itochu could conceivably partner up

to co-source corn/soybean. They could also possibly team up with CPF

and/or CPALL to start a ready-to-eat meal operation that could

distribute through Family Mart convenience store chains that Itochu

runs in China and Japan


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