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Charoen Pokphand Foods

3Q14 expected to bring powerful turnaround BUY

Charoen Pokphand Foods Plc (CPF)

- 2H14 to be even better, particularly for livestock, as animal feed raw material

prices have been falling thus far in the quarter, led by corn (-29.5percent from peak in May)

and soybean meal (-22.9percent from peak in June). We expect spread for livestock to be

significantly better in 2H14, the high season for exports. Russia's trade sanctions

against Europe will also help CPF's business in Russia. We estimate 3Q14 core profit of

Bt4bn with net profit of Bt5bn (1H14 core profit Bt4bn, net Bt5.5bn).

- Expect stronger broiler market in Japan. This year will be especially good since

Thailand is enjoying far higher broiler exports to Japan, particularly after larger orders

are being shifted to Thailand from China. We estimate 2H14 export volume growth at

10-15percent for CPF, giving a continued high gross margin of 17%, similar to 2Q14.

- Thai shrimp business likely to breakeven in 3Q14. Operating losses amounted to a

huge Bt2.2bn in 1H14 and slashed gross margin to -6.5%. Management continues to

believe this business will break even in 3Q14 with a gross margin near zero, signposting

a continuing turn up for the rest of the year. Our workout shows that each increase of

one percentage point in net margin adds Bt4bn to net profit or Bt0.5 per share.

- More positive on overseas business. After a loss of Bt2.9bn in 2013, we expect CPF's

overseas business to produce a net profit Bt800mn in 2014, led by Russia. Russia

reported losses of ~Bt600mn from operations in 2013 but turned around to a net

profit of Bt200mn in 2Q14. We estimate a net profit in 2014 of Bt600mm from Russia

operations. Turkey reported an operating loss of Bt1.1bn in 2013 and we expect it to

reach breakeven with zero loss in 2014.

- CPP HK still the brightest star in 2014, although the divestment of 25% will dilute

net profit contribution from 2015. We originally estimated CPP's contribution at

Bt3.8bn in 2014. After the reduction of CPF's stake in CPP, to be completed by the end

of September 2014, we estimate its contribution to net profit will be reduced by

Bt1.36bn in 2015 and Bt1.62bn in 2016. However, making up for this will be the

reduction in interest expense of Bt1.32bn per year. We have revised our forecast to

include this deal, which adds cash of Bt27.4bn, all of which will be applied to equity,

increasing CPF's BV by Bt3.5/share to Bt21.6. It will also dilute net debt to equity to 1.0x

in 2014 and 0.82x in 2015 from 1.5x.

- BUY; lift target price to Bt42 from Bt35 (2xPBV in 2015). We expect 3Q14 to be

very good, and initially forecast core profit of Bt4bn and net profit of Bt5bn. Book value

will increase in 3Q14 after sale of 25% of CPP, with the sale to be completed in

September. We estimate it will book Bt27bn from this sale into equity by end-3Q14.

We value CPF at 2xPBV in 2015, which raises our target price to Bt42 from Bt35.


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