CP All

CP All Plc
Investment thesis
We believe that expectations of CPALL reporting weak 2Q-4Q13 earnings performances have already been priced in. The stock now trades at an 11-month low and its current PER is the lowest it has been since the 4Q11 flooding (at which time the firm also delivered subdued bottom-line growth). CPALL’s PER is consistent with those of regional CVS players in mature markets, which have long-term EPS growth profiles of only 5-10%. Moreover, there may be some scope for upside from MAKRO's earnings contribution, brought about by more aggressive expansion (likely to be announced on August 14). We maintain our BUY rating with a YE13 target price of Bt45.
Strong 7-Eleven performance
Although heavy rains would have meant slow same-store sales growth in June, favorable weather throughout April and May and numerous public holidays during the quarter should still have made for SSSG of 6-7% in 2Q13. Expansion was ahead of the plan with more than 370 new outlets opening in 1H13, equal to 68% of the firm’s FY13 target of 550 stores. CVS margin should have maintained an uptrend, led by sales of RTE food and cosmetics. 7-Eleven is expected to sustain a strong performance through 3Q13, supported by a stamp campaign that runs from July 26 till Nov 25.
Earnings pressure begins
The pressure on earnings tied to the acquisition of MAKRO will be apparent in the 2Q13 numbers. CPALL won’t consolidate MAKRO's income statement for the quarter, but there were fees related to the acquisition and 10-day interest expenses for the bridging loan to buy a 64.35% stake in the company. As such, although we expect a strong 7-Eleven performance, 2Q13 net profit will post growth of only 5% YoY to Bt2.75bn, according to our model.
3Q13 looks set to be even worse, as there will be a full quarter of interest expenses to account for, as well as new borrowing tied to the tender offer for the remaining shares (the tender offer ended yesterday; CPALL will start paying out for the tender on August 8). We forecast that net profit will fall 18% YoY in 3Q13.
Strong earnings growth to take off next year
We expect the bottom-line to bottom out in 3Q13 and improve in 4Q13, driven by peak earnings season for MAKRO. Robust growth is expected to manifest next year, thanks to absence of fees related to the acquisition, higher MAKRO profits and lower interest costs brought by refinancing and deleverage. Moreover FX risk should vanish later this year, as CPALL intends to refinance its dollar-denominated bridging loan with baht-denominated debentures/bank loans before YE13.