CPALL

CPALL Plc 

In 2015, CPALL will add 600-700 stores and expects same-store sales (SSS) growth to regain strength to 3-5% (from -2.6% in 2014), with gross margin expansion by 20 bps and stricter control over SG&A. It plans more debentures to refinance LT debt to reduce cost of funds. CPALL is set to grow both YoY and QoQ in 1Q15 and to have the sector’s best 2-year EPS growth of 34% p.a. BUY with a new DCF PT of Bt55. 

 

High store expansion. CPALL ramped up store expansion to 698 stores in 2014 (vs. 500-600 stores in 2007-13), reaching 8,127 stores at end-2014. It plans to add 600-700 more in 2015 to reach 10,000 stores within 2018. Its 2015 capex budget is Bt9.1-9.6bn, relatively the same as in 2014, with half designated for expansion and renovation and half for investment in subsidiaries, IT system, and distribution centers. 

 

Better SSS growth. In 2014, its SSS growth contracted 2.6%, hit first by the lengthier cool season in 1Q14 (-1.1%), then the curfew in 2Q14 (0.5%), and finally the flop stamp promotion in 2H14 (-4.1%). While SSS growth is flat so far this year, CPALL expects it to turn up to +3-5% in 2015. It plans to launch more new products (mostly food) to boost sales plus use popular premium cartoons for the stamp redemption campaign this year. It expects to be buoyed by higher purchasing power brought by lower oil prices, the return of tourists and the acceleration of government budget disbursement. It is concerned, however, over weak farm income and high household debt.  

 

Margin expansion. In 2014, convenience store gross margin expanded 140bps. Of this, 20-30bps came from synergy with MAKRO, primarily on joint purchasing, 20bps from a change in product mix with a higher portion of food products, and the rest from a change in accounting methods, i.e. moving the recording of stamp promotion from revenue to cost reduction and the contribution from phone cards from revenue to commission income. In 2015, it targets organic gross margin expansion of 20bps via more focus on food products. In 2014, CPALL successfully cut SG&A (excluding fee expenses) to sales by 10bps, mainly from better personnel productivity, and it targets further improvement in 2015.  

 

Lower cost of funds via refinancing. Of its Bt180bn in LT liabilities for the MAKRO deal, Bt140bn has been refinanced by debentures at an average interest rate of 4.7% and Bt40bn in the form of LT loans with average interest rate of 6%. CPALL plans to issue more debentures to refinance the LT loans to gain from the currently low interest rates. In March, it will issue new debentures of Bt18bn at an average rate of 3.83%. If this goes as planned, we expect its effective rate to fall to 4.8% in 2Q15 from 5.0% in 1Q15 and 5.5-6.0% (blended fee expenses in cost of funds) in 2014.  

 

Maintain BUY. We trimmed earnings by 5% to reflect the slow return of SSS growth for both convenience store and cash and carry YTD. This gives a new DCF PT of Bt55 (from Bt57). CPALL is still positioned to show the sector’s best 2-year EPS growth of 34% p.a., backed by a return to SSS growth (+4%), store expansion, better gross margin (+20bps p.a.), lower blended cost of funds, and debt deleveraging. Its 1Q15 earnings will improve YoY mainly on lower SG&A related to the MAKRO deal (recorded over 3Q13-2Q14) and QoQ from seasonality.