Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

Investment thesis
Following the FY12 analyst meeting, we remain confident that CPF will stage a modest QoQ operational recovery in 1Q13, led by improved domestic farm operations, due to higher farm product prices. We then expect substantially stronger profitability in 2H13, driven by a decline in the cost of soybean meal (SBM). Our BUY rating stands, premised on a strong recovery in 2H13.
Very disappointing 4Q12 results
CPF reported a Bt238m net profit for 4Q12, down by 90% YoY and 90% QoQ. Stripping out extra items—a Bt28m FX gain and a Bt1.9bn after-tax gain from trading CPALL shares—the firm posted a Bt1.7bn core loss (against a Bt1.5bn 4Q11 core profit and a Bt1.6bn 3Q12 core profit). Net earnings were 84% short of our estimate, due to a weak domestic farm operation and slimmer GM than modeled.
The core loss was CPF’s first since 1Q07 (we had expected a Bt488m core profit for 4Q12). GM fell to 7.7% in 4Q12 (12.9% in 4Q11). The deterioration was due to weaker domestic farm operations—chicken, pork and shrimp—and deeper QoQ losses in Turkey, Russia, India, Philippines, Cambodia and Vietnam.
QoQ core improvement to start in 1Q13
We expect the 1Q13 core number to improve QoQ (but worsen QoQ), driven by higher domestic meat prices. The shrimp operation will remain weak, as will overseas units. We expect numbers to rise substantially, starting late 2Q13, when the price of SBM is anticipated to decline.
Sales growth target of at least 15% for FY13
Management anticipates a YoY core profit improvement in FY13, led by improved domestic farm operations and a lower SBM price. CPF guides that EMS disease among shrimp will ease in 2H13, enabling a rebound in shrimp operations. This year, Vietnamese sales should rise by at least 15% and Indian sales by at least 25%, led by meat product price recoveries. Chinese feed revenue should sustain strong growth momentum. The firm guides for FY13 domestic prices of Bt40-42/kg for chicken and Bt64/kg for pork, based on the diminished meat supplies in the market. 
CPF anticipates that FY13 sales will rise by at least 15% YoY, driven by 5-8% feed sales volume growth, higher overseas farm revenue (but flattish domestic farm revenue) and a 20% jump in food sales volume. It guides for FY13-15 CAPEX (excluding M&A deals) of Bt50bn.