Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)  

 

Investment thesis     

Following the analyst meeting, we have lower expectations for FY15 earnings due to deeper losses in Turkey and Russia and the slower-than-expected Thai shrimp recovery. We cut our FY15 earnings forecast 18% (to Bt12.6bn) and our YE15 target price 13% (to Bt35) to factor in deeper net losses at Turkish and Russian units in FY15 and revised shrimp operating loss to be 50% deeper  (to Bt1.5bn operating loss in FY15). Despite the FY15 earnings cut, our BUY rating stands, on a strong 2H15 earnings recovery led by the Thai shrimp unit, shallower overseas losses and an improved livestock margin.   

Recap of 4Q14 results—core number undershoots estimate  

CPF posted a Bt808m net profit for 4Q14, down 54% YoY and 81% QoQ. Stripping out a Bt185m FX loss and a Bt1.3bn net-of-tax gain from trading CPALL shares, it posted a Bt348m core loss, a reversal from the Bt416m 4Q13 core profit and Bt2.9bn 3Q14 core profit. Net profit undershot our estimate by 55%. The core number missed our previous Bt470m core profit forecast, thanks to higher SG&A, lower-than-assumed interest expenses and equity income. The core number drop was led by a lower livestock margin, sustained losses in the Thai shrimp unit and deeper losses at overseas units (Russia, Turkey and Malaysia). It realized the full-quarter impact of its stake reduction in CPP to 50.4% starting 4Q14. 

The Thai shrimp unit posted a Bt923m operating loss in 4Q14, 20% YoY shallower (but 104% QoQ deeper due to low season and a slower recovery). The Turkish unit reported a Bt400m net loss in 4Q14, 11% YoY shallower but 567% QoQ deeper, led by heightened chicken industry competition. The Bt300m Malaysian net loss surprisingly was 140% YoY and 3% QoQ deeper in the red. Russia posted a Bt280m net loss in 4Q14, 75% YoY and 833% QoQ deeper in the red, thanks to a plunge in the Ruble. CPP posted a US$65m 4Q14 net profit, up 6% YoY (but down 14% QoQ on consumption slowdown in China).

Central themes acquired at analyst meeting 

The CEO expects domestic meat prices to rebound in 2H15 after bottoms in 1Q15. He targets break-even at the firm’s Thai shrimp unit in FY15, believes that the Turkish situation will improve and plans to buy out one of the existing players to reduce competition and consolidate the chicken industry. The company targets new shrimp export markets, China and Australia, when the EU GSP for Thai shrimp exports expires after FY15. We estimate a Bt500m 1Q15 core loss, a reversal from a Bt1.74bn 1Q14 core profit and 44% QoQ deeper in the red. The expected weaker 1Q15 earnings are due to low season, a weaker livestock margin, deeper losses at some overseas units and sustained losses at the Thai shrimp unit.