CPALL

CPAll Plc

Targets: SSS up 5%, expansion of 600 stores. CPALL expects its SSS growth at 5.0% in 2014F, vs. 5.7% in 2013. Because of the unusual cold weather, cutting cold beverage sales, which provide 30%of sales, and the economic slowdown, its SSS growth was weak, but still positive, in January. It plans to add 600 stores this year (vs. 607 stores in 2013), on its way to making its goal of 10,000 stores by 2018F (from 7,429 stores at end 2013). CPALL has set 2014 CAPEX at Bt8.9-9.3bn to fund store expansion, renovation and other investments such as distribution centers and its IT system.
Margin expansion. CPALL expects its margin to continue to improve on better product mix, which involves increasing the high-margin products in its stores. These include chilled and frozen foods, bakery, and health and beauty products. CPALL and MAKRO have joined forces in negotiating with suppliers and this stronger bargaining power will be the first synergy visible. Other synergies, such as in logistics, sharing services (logistics, raw material sourcing within the group, and HR, and the development of product cross-selling) will come over time.
Working to refinance debt to lower FX exposure. To fund the purchase of MARKO, CPALL took out a 1-year US$-denominated bridging loan with banks of US$5.8bn or Bt180bn, with all-in cost of funds at ~5%. Of this, Bt50bn was replaced by the issuance of a baht bond in Oct 2013, with average cost of funds at 4.8%. The remaining Bt130bn (5.6% unhedged at end-4Q13) will be refinanced by another baht bond or long-term bank loans over the next few months, with previous guidance for cost of funds at 5-6%. CPALL sees this as good timing, since interest rates are now trending down. Note that we assumed average cost of fund of 5.5% on the Bt130bn remaining debt that is now being refinanced. Our sensitivity analysis suggests that every 25bps cost of funds below our assumption increases its earnings by 2%.
Deleveraging on course. Backed by operational improvement, we expect CPALL’s net debt/EBITDA to come down from 8x in 2013 to below 3x in 2016F and net DE to fall from 6x in 2013 to below 2x in 2017F, in line with its target.
Trim earnings slightly but no change in TP; Maintain BUY. Our 2014-15F are trimmed by 3% when we change to a more conservative SSS growth of 5-6%, but this does not change TP, which is now placed at end-2014. The concern on the slowdown of its SSS growth from cold weather is a short-term issue. It has also been priced into the share, which has underperformed the SET by 10% and its sector by 6% so far this year. We continue to like CPALL on: 1) upcoming business synergies with MAKRO; 2) debt refinancing that will lower FX exposure and may also cut cost of funds since interest rates are moving down. Key risks are a change in SSS growth, store expansion, business synergies and the expenses from the acquisition.