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Charoen Pokphand Foods

Oct 17. 2012
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By Asia Plus Securities

Q3-Q4 2012 still on rough path

Charoen Pokphand Food Plc (CPF)

Q3 2012 net profit projected to drop 32% QoQ… meat price falls against rise of raw material price

CPF’s business outlook in Q3 2012 still wouldn’t shine as we projected earlier.

Net profit would stand at B2.7bn or a decrease of 32% QoQ and 46% YoY

due to the following reasons. 1) The total sales in Q3 2012 are projected to

increase only 3% QoQ. Although there are benefits from export season that

help urge sales in every type of products, the pressure from selling price of

meat products (both local and international) has decelerated. This reflects

from the average prices of broilers and farm-gate pigs in Q3 2012 that has

declined by 4.7% and 6.7% QoQ respectively, offsetting the abovementioned

factors. As a result, CPF’s total sales in Q3 2012 are unlikely to stand so high. 2)

Gross margin in Q3 2012 is projected to fall from Q2 2012 due to the cost of main

raw materials (60% of the total selling expense) in Q3 2012 that has increased,

especially corn and soybean meal prices which have risen by 6.2% QoQ and

29.5% QoQ. Accordingly, CPF’s gross profit margin has descended to 13.3%

from 13.6% in Q2 2012. 3) In Q3 2012, the company is projected to have no profit

from selling investment like one in Q2 2012 (B1.3bn), while there’s no change

for other items. Overall, 9M12 net profit is projected at B19bn or 41% growth

from the same period of the prior year, considered 72% of our FY2012 net

profit forecast.

Shrinkage still seen in 4Q12… Export season passes. Meat price still not recover

Preliminary, we project CPF’s net profit in 4Q12 would slow down from 3Q12

(pushing FY2012 net profit to fail our projection) due to the following

reasons. 1) The high season has passed, so the tendency of selling volume in

every type of products has dropped QoQ. 2) The price of meat products still

remains constantly low (the average prices of broilers and farm-gate pigs

since the beginning of October 2012 until present have stayed at B32/kk and

B50/kk respectively which is considered a decrease of 9.1% QoQ and 11.4%

QoQ). This is a result of the acceleration on expanding production capacity

which is so significant that the market has been flooded by lots of meat

products, brining about oversupply problem. There’s a positive factor from

the decelerated prices of raw materials (corn and soybean meal) in Q4 2012 but

the selling price of meat products has declined at a faster rate, so this won’t

cover the average production cost in 4Q12 and affect the farm business (31%

of the total revenue). However, we’re convinced that the overall look of farm

business would recover in 2013 after entrepreneurs with high cost of

production start decreasing their production to meet the domestic demand,

bringing the price of meat product to stand above the cost of production once

again.

Share price substantially reflects negative factors already… wait for recovery in 2013

We believe that CPF’s share price has substantially reflected negative factors

already (low PER below 10x). Nevertheless, the dim tendency of 2H12

operating result might cloud above the share price in the next 3 months.

Therefore, we recommend only gradual “BUY” when the price weakens for

short-term investment. For long-term investors, this is now a good chance

for “Accumulate”, waiting for the recovery of operating result in 2013.

Combined with the strategy of organic and inorganic growth, CPF would be

boosted to expand its international business rapidly which is a positive factor

for the growth of net profit in a long term.

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