CPALL

CPALL Plc (CPALL)

Subsidiary plans to increase production capacity, raising CPALL’s sales and continually boosting margin
Apart from 99.99% stake held by CPALL, CPRAM is a subsidiary who produces
ready-to-eat line (bakery, dim sum, chilled and frozen food) of which 50% is
directly launched into 7-11 convenience stores. CPRAM has revealed its strategy in
5 years ahead under the total budget of B20bn, preparing to increase the
production capacity of the existing 6 factories along with building 7 new factories in
preparation for domestic market access and to support 7-11 branch expansion that
focuses more on ready meals. Moreover, varieties of 3 meals have been increased
which is considered CPALL’s selling point and uniquely outstanding strategy. For
CPRAM’s increase of production capacity, it would be directly beneficial for CPALL
as follows. 1) Food service sales (bakery, fast food, chilled and frozen food) with
the margin higher than other types of food would be raised, standing at 21% in
proportion of sales in 9M12 with around 35% of the gross margin. For the total
food products, they stand at around 73% in proportion with around 25.5% of the
gross margin. 2) CPALL has lower cost as if it produces and sells itself as CPRAM
produces and directly launches its products to CPALL. The products from CPRAM
are projected to boost CPALL’s gross margin to go further than other producers’
goods by approx 15% (based on CPRAM’s 2011 financial report). Despite only 4-
5% contribution of CPRAM’s products to the total sales due to the current
production capacity that’s quite limited, the abovementioned plan of CPRAM to
increase the production capacity is projected to raise sales of CPRAM and
noticeably urge the future gross margin. In 2013, CPRAM would gradually increase
the production capacity under the budget of approx B1-1.5bn, focusing firstly on
frozen food in 1H13.

Long-term profit (5 years) forecast revised up to reflect constantly improving profit margin
Accordingly, CPALL’s profitability is believed to increase continuously in 5 years
ahead. Furthermore, the company has revised up a plan to expand its branches
from 500 to 550 branches per year. Combined with 9M12 net profit which is
considered 77% of FY2012 profit forecast, we revise up our 2012 and 2013 profit
forecast by 4% and 10% respectively. Moreover, 2014-2017 net profit forecast is
revised up under an assumption of the gross margin that increases by 40 bps per
year (from the previous 10 bps). Under the new assumption, 2012 net profit would
be B11,153m or 39% increase from the same period of the prior year, projected to
thrive constantly by 26% in 2013. In terms of the compound annual growth rate in
the next 5 years (or 5-year CARG), it is projected at 22% in average.

New fair value is B52. Combined with high-level growth, upgrade to “BUY”
Apart from the abovementioned outstanding growth, there’re also strong
fundamentals (no debt with interest and ROE that’s the highest along peers at
40%). Recently, the company has opened the 5th branch (in Lamphun) to meet
with the growth of new branches in the North and to manage the logistics system
to highest efficiency. We’re convinced that CPALL would be able to expand its
branches to 10,000 units (from the current 6,800 branches) in 5-6 years as
targeted. The new fair value, using DCF (9.51% WACC and 2% TV growth), in
2013 stands at B52. This reflects the assumption of long-term profit (5 years,
previously based on PER) and 27% upside. Currently, the share price has leveled
off for the past one month after 3Q12 earnings result has been announced which is
a result of big lot that already ended. According, this brings about a good chance
to gradually accumulate once again. We upgrade our recommendation from
“HOLD” to “BUY”. However, the share price might be pressured by psychological
effects due to concerns toward the reduction of investment in CP group in the
future due to the international investment policy that requires considerably high
amount of investment budget.