Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)
What’s new?
On July 24, 2014 CPF and CPF Investment Ltd agreed to sell 6,018m
ordinary shares of CP Pokphand Co Ltd (CPP) to Itochu Corporation at
a price of HK$1.10/share—total consideration of HK$6,620m
(Bt27,397m). Following the share sale, CPF and CPFI will hold 50.43%
of the shares in CPP (down from 74.18%) and ITOCHU will hold
23.8%. The transaction is expected to be completed in Sept 2014.
Net neutral impact on income statement but …
The sale proceeds will be used to pay down debt. Assuming an
average cost of debt of 4.9% in FY13 and that the entire Bt27bn in
proceeds are used to repay debt, we estimate that interest expenses
would decline by Bt1,345m per annum. With CPF’s equity stake in CPP
downsized to 50.43% and estimated annual CPP earnings of Bt5.7bn,
we estimate that CPF’s yearly profit would decline by Bt1,348m. That
makes for a net neutral impact on CPF’s bottom-line, which we have
modeled into our forecasts.
…. positive impact on balance sheet—lower gearing
Assuming a Bt27bn debt reduction (all the proceeds are used to pay
down debt), we estimate that interest-bearing debt would decline 14%
from Bt196bn at end-March to Bt168bn at end-Sept 2014. The interestbearing
debt/equity ratio would fall from 1.77x at end-March to 1.3x at
end-Sept. We estimate that the D/E ratio would drop further to 0.9x at
YE15.
Gain from sale might boost future dividend payout
Based on CPF’s cost of CPP shares at HK$0.90 apiece and its sale of
the shares at HK$1.1 apiece, we roughly estimate a Bt4.98bn pre-tax
gain and a Bt4n after-tax gain. Management told us that CPF will
continue to consolidate CPP into its income statement following the
share sell-down—the auditor won’t allow the firm to book the gain to the
consolidated income statement, but will allow it to book it to the
unconsolidated statement. CPF usually pays its dividend from
unconsolidated EPS. Based on a 56% payout ratio for FY13, the firm
may pay an additional DPS of Bt0.52 (scope for upside to next year’s
dividend payout).
Possible business-building with Itochu?
Itochu is a Japanese trading house engaged in a range of industries,
including food and retail. CPP and Itochu could conceivably partner up
to co-source corn/soybean. They could also possibly team up with CPF
and/or CPALL to start a ready-to-eat meal operation that could
distribute through Family Mart convenience store chains that Itochu
runs in China and Japan