CP ALL

CP ALL Plc (CPALL)

To purchase 64.35% of MAKRO’s stake at B787/share, making tender offer for the rest
CPALL has announced a plan to purchase MAKRO shares from the major shareholder SHV
Netherland B.V. both directly and indirectly by 154.43 million shares or 64.35% of total
shares with tender offer of B787/share. For the final part of process, CPALL has to obtain
an approval from the shareholder meeting on 12 June 2013 before it could make tender
offer at the same price for the rest of shareholders. The whole process is projected to
complete around August 2013. To finance the deal, CPALL would need B189bn in total;
10% would come from its cash flow, and the rest 90% or roughly B170bn would be
bridge loans from 7-8 financial institutions with SCB as a major part.
- 2013 profit tends to stabilize, but benefits to come clear next year onward
Although CPALL’s tender offer is 17x higher than MAKRO’s book value at end-2012 at
B10,657m or B43.7/share, we believe that future benefits for CPALL would be worth
investment. Accordingly, after the acquisition of MAKRO, CPALL would become the 3rd
largest modern trade of Asia with total sales worth of B313bn, owning both Thai
convenience store and cash-and-carry retailer businesses. This would also bring about
synergies between CPALL and MAKRO in order to enhance profitability; for instant, gross
profit margin is likely to heighten due to increased negotiation power against each
supplier from the volume rising immediately after acquisition. In addition to this, the
company’s expenses would lessen because of logistic system sharing. Other than that,
CPALL can enhance value from MAKRO’s 56 branches; 53 branches of which are on its
own sites, located in Bangkok and other major provinces by 38 branches. Currently,
market price is supposedly multiple times higher than book value. In the future, CPALL
could, for one thing, sell MAKRO into property fund to serve as future capital source.
Apart from that, the company would expand its business into neighboring Asian countries
to seize benefits from liberalization under AEC in the future, using MAKRO as a main
method to expand its business into Cambodia, Myanmar, Laos and Vietnam because the
brand 7-11 in still under condition to get permission for rights from the parent company
in Japan. This particular deal is projected to complete in late-3Q13. We revise our CPALL
forecast by combining MAKRO as a part of CPALL’s operation in the financial budget since
4Q12 onward under an assumption of goodwill from the gap between MAKRO’s purchase
price and book value (practically, goodwill is from difference between purchase price and
net asset value, which still hasn’t been revealed) and an assumption of US$ loan rate at
2% (based on SIBOR loan rate). Under the new assumption, CPALL’s 2013 net profit
would still be close to the previous forecast because interest expense and financial
advisory fee would offset MAKRO’s profit. Nevertheless, since 2014 onward, MAKRO’s
profit is projected to increase beyond interest expense, resulting in 29% increase of total
profit. For the profit growth in 5 years ahead (5-yeay CARG) it is estimated at 30%.
- New FV is B60, reflecting benefits from synergies. Reiterate “BUY”, choosing as top pick
After the acquisition, debt to equity ratio would multiply by 6x; however, continuously
improving earnings are projected to bring about operating cash flow to reduce some debt.
Accordingly, debt to equity ratio would decrease to 1x within 5 years. Under an
assumption that CPALL still pays dividend yield constantly by not less than 50% of net
profit and the company’s reassurance for no capital raising in 1 year and a half, fair
value, using DCF (WACC 9.5%, 2.4% terminal growth rate), increases from B52 to B60.
We reiterate our recommendation of “BUY”, choosing CPALL as a top pick. For MAKRO,
we recommend waiting to sell at tender offer price.