CP All

CP All Plc (CPALL)
CPALL reported a 2Q13 net profit of Bt2.65bn, up 2% YoY but down 17% QoQ. The figure was 4% below our estimate, due to a slimmer-than-expected gross margin.
Results highlights
The top-line increased only 12% YoY, due to a change in accounting policy for phone card sales from revenue to service fees (booked as “other income”), but ex-phone card revenue still rose 15.9% YoY, which comprised 8.3% new store openings and 7.6% SSSG. The basket size increased 5% YoY to Bt59 and the number of tickets rose 2% YoY to 1,316 tickets/store/day.
During 2Q13, CPALL opened 169 new outlets, taking the total number of new stores in 1H13 to 388—70% of its FY13 target of 550.
Gross margin (ex-T&E) was maintained flat YoY at 25.6%. Food margin dipped 10 bps YoY to 25.9%, due to promotions, but non-food margin expanded a further 20 bps, driven by heavier sales of cosmetics and personal care products.
The SG&A/sales ratio rose 136 bps YoY to 24.1%, due to the second round of the minimum wage rise in January, higher utilities costs and fees tied to the acquisition of MAKRO.
CPALL’s board yesterday approved the issuance and offering of bonds to a value of Bt90bn to refinance a portion of the bridging loans for the takeover of MAKRO; the remainder will be refinanced with bank loans. The refinancing is expected to be completed by YE13, at which point there should be no more FX risk.
Outlook
We expect net profit to drop both YoY and QoQ in 3Q13, as there will be a full quarter of interest expenses to account for and new borrowing tied to the tender offer for the remaining shares in MAKRO. Note that after the tender offer ended on August 5, CPALL’s stake in MAKRO increased to 97.88% from 67.15% at end-June. We expect earnings to bottom out in 3Q13 and improve in 4Q13, driven by peak earnings season for MAKRO. Robust growth should manifest next year, thanks to the absence of fees related to the acquisition, higher MAKRO profits and lower interest costs brought by refinancing and deleveraging.
What’s changed?
We maintain our earnings projections and YE13 target price unchanged.
Recommendation
Short-term weak earnings are behind us. We believe that expectations of CPALL reporting weak 2Q-4Q13 financial performances have already been priced in. Our BUY rating stands with a YE13 target price of Bt45.