CPALL

CPALL Plc

We expect CPALL to deliver the sector’s highest 2-year EPS growth of
27% as expenses related to the acquisition of MAKRO slim down and it
is able to claim greater synergy with MAKRO. CPALL will also have the
sector’s lowest 2-year PEG of 1.2x. Earnings momentum will improve
from 2H14. We maintain BUY with mid-15 DCF PT at Bt58.
Maintain BUY with a new DCF PT of Bt58, rolling over to mid-2015 from Bt51 at
end-2014. CPALL is trading at 33x 2014PE, equivalent to +0.75SD of its historical 5-year
PE. CPALL is positioned to deliver the sector’s best 2-year EPS growth of 27%. Behind
this is lower expenses from the acquisition of MAKRO and greater business synergy
with MAKRO. Earnings will begin to show real improvement from 2H14 as SSS growth
improves from more normal weather patterns, lower acquisition expenses and
upcoming synergy. CPALL will also have the sector’s lowest 2-year PEG at 1.2x.
Resilient SSS growth amid continued store expansion. We estimate 2014 SSS
growth of 4% (vs. 5.7% in 2013), partly due to the unusually long cool season that ate
into cold beverage sales (30% of sales) in early 2014. The impact on SSS growth from
the economic slowdown is thought to be negligible. SSS growth has been quite strong
at 8.5% over the past seven years through all the bumps and turns of the economy and
politics. It will continue to expand rapidly, adding 600 stores/year, more than the 2013
expansion target of 500-550. This will give it 8,029 stores at the end of 2014.
EBIT margin to expand to 7.1% in 2014 and 7.7% in 2015 from 5.7% in 2013. Apart
from lower fees related to the acquisition of MAKRO, margin will be given a boost by
organic gross margin expansion of +20bps/year brought by a greater focus on highmargin
food products and inorganic expansion from business synergy of 15-20 bps for
CPALL and 10-15bps for MAKRO in 2014-15. This includes joining forces with MAKRO to
negotiate with suppliers and sharing services such as logistics, raw material sourcing
within the group, HR and the development of product cross-selling.
Completed debt refinancing of the one-year US$ bridging loan for the acquisition of
MAKRO (Bt183bn) to LT liabilities. The refinancing consists of: 1) a Bt50bn bahtdenominated
bond in Oct 2013 and another Bt40bn bond in March 2014 (average tenor
of seven years, fixed rate at 4.8%); and 2) baht-denominated LT loan of Bt82bn and
unhedged US$ LT loan of Bt11bn (US$350mn) in March 2014 (average tenor of 2-6
years, floating rate). It estimates all-in costs (fees and interest expenses) at ~5.5% post
refinancing in 2014, with fees related to this transaction to be booked in 1H14. CPALL
plans to issue more baht bonds to refinance the LT loans to lock in a more favorable
rate during the downward trend and to close its FX exposure.
Deleveraging on course. Backed by operational improvement, we expect CPALL’s net
debt/EBITDA to come down to below 3x in 2016F from 8x in 2013 and net DE to fall to
below 2x in 2017 from 6x in 2013, in line with its target.