Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

Investment thesis
Following a conference call with the IR, we have diminished expectations for 2Q-2H13 earnings—shrimp-related operations now look unlikely to improve materially till FY14. Hence, we have slashed our FY13 net profit forecast by 34% and downgraded our rating to TRADING BUY. CPF’s valuation looks stretched—PERs of 35x for FY13 and 23x for FY14.
A core loss is now expected for 2Q13
We estimate a Bt1.2bn net profit for 2Q13, down 70% YoY but up 17% QoQ. Stripping out FX and a trading gain on CPALL shares, we expect the firm to post a Bt450m core loss for the quarter (22% shallower QoQ, but a reversal from the Bt3bn core profit posted for 2Q12). The anticipated YoY deterioration is due to weaker shrimp and overseas operations (specifically Russia, India, Malaysia, Philippines and Vietnam). The assumed QoQ improvement was led by high season, fatter domestic farm margins and numbers for the Turkish business.
The Vietnamese unit will post a deeper QoQ loss, due to drops in pork and chicken prices. The Malaysian unit’s loss will also deepen QoQ on a weaker shrimp operation. Cambodia, Laos, India, Taiwan, Russia, Philippines and China should post flattish QoQ bottom-lines.
Shrimp operation to normalize in FY14
We now expect only a slow shrimp recovery in 3Q13, given that there won’t be substantial new shrimp supply till August-Sept (we had previously anticipated July-August). Operational normalization is assumed in 2Q14. Early Mortality Syndrome (EMS) remains a significant problem, as there aren’t any definitive cures for the disease. 
Planned acquisitions—CP-Meiji and RBPI
CPF announced plans for two asset purchases (assuming it gets shareholder approval at an EGM). Firstly, CP Merchandising Co Ltd (a wholly-owned subsidiary) will buy 60% of CP-Meiji Co Ltd from CPG for Bt1.2bn. Secondly, CPF Investment Ltd (a wholly-owned subsidiary) will take a 78% stake in Russia Baltic Pork Invest ASA (RBPI) for Bt2.96bn from Capman Russian Fund LP in 3Q13. Based on 2012 net profits of Bt206m for CP-Meiji and Bt343m for RBPI, CPF’s bottom-line would rise about 2%—marginal.    
FY13-14 earnings forecast and target price cuts
We have slashed our FY13 net profit forecast by 34% (to Bt6.5bn) and our FY14 number by 30% (to Bt9.9bn) to factor in diminished expectations for shrimp and overseas operations. Our YE13 target price declines to Bt33 from Bt38.5.