CP All

Rebound expected from now on 2Q14 earnings result was disappointing, but it was from temporary financial cost that would gradually decrease, while the main business, both CPALL and MAKRO, would improve and rebound strongly. The share price may weaken to

CP All Plc (CPALL)

- 2Q14 profit disappointing from higher-than-expected financial cost

2Q14 profit was substantially lower than expected, decreasing 17%qoq and

15%yoy to B2.2bn (18% lower than consensus), mainly because finance

charges (apart from interest) from the acquisition of MAKRO were still

recognized in 2Q14 and also larger than expected due to the loan refinancing in

late 1Q14. As a result, total financial cost in was B2.86bn (B2.4bn booked in

interest expense and B400m in SG&A) or 6%, versus 5-5.5% in 1Q14.

Moreover, effects from the political situation on the main business were worse

than expected. Same-store-sales of CPALL could grow only 0.5%yoy; despite a

benefit from the World Cup 2014, the number of customers decreased as much

as 3%yoy (for two consecutive quarters). Likewise, MAKRO’s profit increased

only 10%yoy (versus 26%yoy growth in 1Q14) owing to lower-than-usual sales

growth of provincial stores and decreasing EBIT margin of provincial branches.

Overall, gross margin remained flat from the prior quarter.

- Cut 2014-2015 profit forecast by 21% and 18%

As 1H14 profit makes up only 37% of FY2014 forecast, we slash our forecast

for 2014 and 2015 respectively by 21% and 18%. Average financial cost is

increased from 5.16% to 5.5% (close to CPALL’s target). Same-store-sales

growth is reduced from 5%yoy to 2%yoy for FY2014, while the growth of

4%yoy is foreseen in 2H14 and 5%yoy in 2015. Even though FY2014 profit

growth under the new forecast is not remarkable, it likely has already bottomed

out; the profit in 2H14 would also improve from 1H14 and from the same

period of last year (yoy) following the recovering economy. Furthermore, 2H14

is a high season for both CPALL (peaking in 3Q from the stamp campaign) and

MAKRO (peaking in 4Q). In addition, financial cost in 2H14 would decrease due

to lower fee charges. The company also has a plan to launch bonds in an

amount of B40bn, with low funding cost of 4.8%, to refinance its long-term

bank loan, which will become fully effective next year; this is another factor to

boost the profit growth in 2015 to 30%.

- Share price may weaken today. Buy

Although the current share price is close to the new fair value of B48/share, we

will start using 2015 fair value after 3Q14 earnings declaration, which implies a

significant upside. For today, the share price may decline from the

disappointing 2Q14 earnings result. We recommend buying on weakness,

waiting for good growth next year.