Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)

Continuous loss foreseen in 1Q13 due to dull shrimp business
We project that CPF will continue to suffer a loss of more than B800m in 1Q13,
improving from a massive loss of B2bn (extraordinary items excluded) in 4Q12
though. The pressuring factor is the shrimp farming and shrimp food business
(accounting totaling for 12% of CPF’s total income) that is projected to decline
continuously in this quarter because the early mortality syndrome (EMS) in
white shrimps has made white shrimp products from CPF farms and other
entrepreneurs in Thailand plunge as much as 30% from the same period of last
year. On the other hand, there is a supporting factor from the livestock farming
business (30% of CPF’s total income) that is projected to reverse to show a
profit again as evident by an average selling price of live chicken and a farm
gate price of swine in 1Q13 which have increased 8%qoq and 18%, respectively,
to B40.67/kg and B63/kg. At the same time, cost of raw material - corn and
soybean meal - has decreased 1%qoq and 8%qoq, respectively, in this quarter,
pushing up the business margin from the previous quarter. However, overall, the
aforementioned negative factor has more weight, so the company would still
face a net loss in 1Q13. The forecast has still not included a possibility that CPF
would book extraordinary profits such as profits from investment sale, which are
considered as an upside for the earnings in 1Q13 to be better than our
projection.

Not so bright in 2Q13. To revert to normal in 2H13
Earnings performance in 2Q13 might not be so bright because of a pressure
from the sluggish shrimp business. However, the company disclosed that it has
already known the cause of shrimp plague and found the prevention, so the
problem is believed to ease off in the end of 2Q13. This is in line with our
projection that the net profit would become normalize in 2H13, with a support
from a decrease in the cost of raw material as prices of corn and soybean meal
in global market have dropped respectively by 24% and 30% from a peak in
August 2012 because of increasing overseas supply. The situation would
consequently be beneficial for the margin of CPF’s animal farming in 2H13 after
the current stocks have begun to recede (CPF has an advance stocks of corn for
using until August 2013 and soybean meal until April 2013). In terms of risk,
although the net profit in 2013 (extraordinary items excluded) would improve
from the previous year, our earnings forecast for FY2013 might be too high,
because a recovery of the shrimp business might be later than expected.

Reiterate to buy.Waiting for positive factors ahead 2013’s fair value, using 17x PER, is B38.38. The current share price has an upside of over 16% and we believe the share price has substantially reflected the negative factors. In addition, earnings in 2H13 are projected to show a
better recovery, which would help recover CPF’s share price from present. BUY.