CP All

CP All Plc (CPALL)
Investment thesis: CPALL’s share price has underperformed the SET by 11.5% since May, due to its high valuation and disappointing 2Q12 results. But we believe the underperformance phase has already ended; the firm is now at the start of its best quarter yet. Its valuation is also attractive—an FY13 PER of 24.5x versus a peer average of 26.1x. Now would be a great time to load more CPALL shares into portfolios. We have a conviction BUY rating on the stock with a YE13 target price of Bt45.
Double-digit SSSG for three straight quarters: After posting robust SSSG of 10.5% for 2Q12, CPALL should also deliver double-digit SSSG for both 3Q12 and 4Q12, boosted by its stamp campaign. The promotion has proved particularly effective at boosting the sales of specific products—extra stamps are issued to customers that purchase the said items. As such, many suppliers have lined up to offer extra stamps (at their own expense) in order to maintain market share. Not only is this circumstance effectively boosting CPALL’s sales, but it is also reducing its marketing expenses.
Robust earnings growth ahead: Although the campaign will push up advertising and marketing expenses, we expect a net addition to the 3Q12 bottom-line, enhancing growth to 18% YoY. 4Q12 looks even more exciting. The campaign’s advertising expenses are front-loaded (mostly booked in 3Q12), while the revenue is back-loaded (a demand surge to collect stamps and also the promotions of suppliers). Moreover, there should be some reversal of expenses, as not all the stamps will be redeemed for cash or premium collection. Coupled with the low base effect, we expect CPALL to post spectacular profit growth of 80% YoY for 4Q12.
Increasing competition but no worry: Over the longer-term, competition in the CVS market will intensify with the entry of well-healed newcomers. But we aren’t concerned about CPALL’s growth or profitability outlook, as the firm has long been prepared for such an eventuality. It has differentiated itself by transforming its 7-Eleven network into a convenience food store chain. The huge logistics and scale that would be needed to compete head-on with CPALL will keep it a country mile ahead of the competition for years into the future.