Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)

Bottom out. Recovery sign seen from shrimp and livestock business
CPF is confident that the net profit in 2H13 would begin to recover due to
following contributions. 1) The shrimp business would show positive
development after the company could find an effective prevention for the EMS
(early mortality syndrome) disease that could decrease the damage of the
shrimp farm to only 20% from 50%. Moreover, CPF has also assured shrimp
farmers with damage insurance. Accordingly, we believe CPF’s feed and shrimp
businesses would improve since 2H13 onward. 2) Livestock business (chicken
and swine) is projected to brighten as livestock prices have stayed high
continuously as a result of a tight supply of chicken product after Sahafarms
temporarily stopped its production as a result of the financial problem. At the
same time, raw material cost has also declined more than 20% over the past 2
weeks because of increasing soybean supply in North America. Consequently,
gross profit margin of the livestock business would be higher in 2H13.
- Cut forecast to reflect sluggish recovery of shrimp business, but 2H13 profit would be better than 1H13
We cut our net profit forecast for FY2013 respectively by 38% and 28% to
reflect the lower than expected earnings in 2Q13 as a result of the EMS.
Accordingly, the full year net profit would drop 49%yoy in 2013 before reversing
to the growth of 43% in 2014. Net debt to equity ratio at end-2Q13 is high at
1.25x, so CPF has to delay unnecessary investment plans, setting CAPEX at
B50bn for the next 5 years (from previously 3 years) for liquidity management.
As earnings have improved in 2H13, cash flow from operation would increase
and net debt to equity ratio at end-2013 would drop to 1.13x, thus helping
alleviate concerns.
- Share price substantially absorbs negative factors. Time to accumulate
As CPF’s earnings are highly fluctuating, we change a method for fair value
calculation to PBV of 2.18x (GGM), under long-term ROE forecast of 17.5%,
resulting in a new 2013 fair value at B32.29 (from B35.23, at 17x PER). We
believe the negative factors from dull earnings performance during 2H12 – 1H13
have already reflected in the fall of 38% in the share price since the middle of
2012. At the same time, the domestic livestock business has brightened, as so
the shrimp business. This is a good opportunity to accumulate CPF for long-term
investment.