Charoen Pokphand Foods

Investment thesis     

Following the analyst meeting, we believe that CPF’s Thai shrimp unit is on course to break even in FY15. Moreover, overseas operations will improve, led by more balanced demand-supply dynamics (especially in Turkey, Russia and Malaysia). We have cut our FY14 core profit projection by 7% to Bt8.7bn to reflect the weak 3Q14 core number, but maintain our FY15 core earnings forecast unchanged. Our BUY rating stands, premised on an FY15 Thai shrimp turnaround and improving overseas bottom-lines.    

3Q14 results recap—core profit undershot estimate  

CPF posted a Bt4.16bn net profit for 3Q14, up by 57% YoY and 17% QoQ. Excluding a Bt1.3bn net-tax gain from trading CPALL shares, core profit would be Bt2.9bn, up 70% YoY and flattish QoQ. The bottom-line exceeded our model by 4%. Core profit was 18% below our estimate, due to lower GM and higher interest expenses than assumed. The YoY core profit jump was led by a shallower Thai shrimp unit loss, fatter livestock margins and improved overseas bottom-lines (except for Malaysia, the Philippines and China). The flattish QoQ core profit was led by weaker overseas operations (chiefly  in Russia, Malaysia and Vietnam) and slimmer Thai livestock margins. 

The Thai shrimp unit posted a Bt453m operating loss, shallower by 71% YoY and 51% QoQ, due to greater shrimp output. Turkey reported a Bt60m net loss in 3Q14, shallower by 77% YoY and flattish QoQ, led by reduced market oversupply. Malaysia, surprisingly, chalked up a Bt290m net loss, deeper in the red by 123% YoY and 480% QoQ, due to an outbreak of White Spot disease among shrimp (EMS having eased). Russia (including RBPI) posted a Bt30m net loss (a reversal from a Bt200m net profit in 2Q14), due to a lower pork price following a spike in 2Q14. CPP posted a US$75m net profit, up by 19% YoY, led by a profit jump for Vietnam in tandem with higher pork prices.

Positive feedback from analyst meeting 

The Thai shrimp unit recovery will continue through FY15, led by greater industry-wide output and CPF in-house production using techniques to limit the severity of EMS. We expect the operation to break even in FY15 against a forecast Bt3.2bn operating loss for FY14. 

China, India, Russia and the Philippines will be the FY15 overseas growth drivers. We expect a shallower Turkish loss in FY15. The Malaysian loss will persist next year, due to White Spot shrimp disease. The Russian unit will break even in FY15, led by pork exports from Thailand, which will start in 1Q15. CPF will export shrimp from Vietnam and Malaysia when EU GSP tax privileges for Thai shrimp expire in 2015.