CP All

CP All Plc (CPALL) 

 

21% below our estimate

CPALL reported 2Q14 earnings of Bt2.25bn, down by 15% YoY and 17% QoQ. The figure was 18% below the Bloomberg consensus and 21% short of our estimate, due to weaker-than-expected SSS, higher SG&A expenses than modeled and a MAKRO profit that was 10% below estimate (due mainly to GM squeeze).

Results highlights

Revenue jumped 74% YoY to Bt89bn, due mainly to the financial consolidation of MAKRO. Excluding MAKRO and adjusting for an accounting change in the booking of phone card sales, CVS sales grew 9.5% YoY in 2Q14, driven by branch expansion. SSS (ex-T&E) grew only 0.5% YoY, due to weak consumption and the impact of the curfew. The mean number of tickets declined 3% YoY to 1,274 tickets/store/day, but the average basket size rose 5% YoY to Bt62.

CPALL rolled out 165 CVS outlets in 2Q14, taking the 1H14 number of new to 387, equal to 64.5% of the full-year target of 600 new stores.

CVS product margin (ex-T&E) rose by an impressive 60 bps YoY and 50 bps QoQ to 26.2%, driven by Line Friends and Rilakkuma cups, which boosted margins for both the non-food (cups) and food (drink inside the cups) merchandise categories.

Despite lower expenses related to acquisition of MAKRO, SG&A expenses (ex-MAKRO) still rose 13% YoY to Bt14.5bn in 2Q14, higher than our model, due to a 54% YoY jump in advertising expenses to Bt2bn in the quarter.

Outlook

We expect stronger 3Q14 numbers, driven by stamp campaigns (running from July 26-Nov 25), lower expenses related to the acquisition of MAKRO and reduced interest expenses with the refinancing of Bt40bn in long-term loans to debentures in August.

What’s changed?

Advertising expenses are likely to stay at the current high level, as CPALL intends to launch more promotions to deal with intensified competition in the CVS industry. As such, we have cut our earnings forecasts by 1% for FY14, by 7% for FY15 and by 8% for FY16 and trimmed our YE14 target price to Bt48 from Bt50.

Recommendation

Given only 3% upside to our target price, we have downgraded our rating to HOLD from BUY. There would be scope for upside from CPALL reducing its stake in MAKRO, which we expect to take place before mid-2015. The firm may sell a 25% stake in MAKRO to refinance Bt50bn in long-term loans.