CP All

CP All Plc 

Investment thesis

Over the past two years, CPALL’s earnings growth had been disappearing as the interest expenses on the huge loans required to finance the acquisition of MAKRO ate all growth from its CVS business—until now. That story is reversing and we expect its earnings growth going forward to be higher than normal as a de-gearing effect is going to play out. Its net margin is expected to expand, which should drive delivery of three-year core earnings CAGR of 30%, FY15-17. We thus believe now is a good time to take a position in CPALL ahead of such robust earnings growth. We maintain our BUY rating on CPALL with a YE15 target price of Bt49.

Highest earnings growth in the sector this year

CPALL’s SSS are expected to grow only 1-2% in 1Q15 and should accelerate in 2Q-4Q15 on the back of the low base set by the curfew in 2Q14 and the unsuccessful stamp campaign in 3Q-4Q14. However, like many Thai retailers this year, the SSS number alone may not be telling the whole story. Although we assume SSSG of only 3% this year, CPALL should still deliver strong core earnings growth of 29% in FY15, which would be the highest in the sector. Besides its aggressive expansion, the lower expenses relating to the acquisition of MAKRO and the declining interest expenses (as a result of refinancing) would play major roles in driving up this year’s profit. We don’t think our forecast is too aggressive as it is still below the street by 5%.

De-gearing effect to boost long-term growth profile

Over the long-term, besides aggressive roll outs and gross margin expansion, declining interest expenses after loan repayment should be a big boost to bottom line and underpin CPALL’s growth profile to achieve results even superior to those of the past. CPALL has interest-bearing debts of Bt183bn, of which Bt160bn is debentures and the remainder is long-term bank loans. Such loans will be repaid over the next five years, while debentures will gradually reach maturity, starting Oct 2016 (see Figure 2). We expect CPALL will repay most of the maturing debentures thanks to its strong free cash flow (Bt17bn in FY15 and to grow by 25-30% per annum). Impact from declining interest expenses alone should expand net margin 12bps in FY15, 36bps in FY16 and 34bps in FY17.

Sales of some MAKRO shares will be an upside

The interest expenses will fall even faster if CPALL sells some of its MAKRO shares and uses the proceeds to pay down the debt. Currently, CPALL has long-term loans of Bt23bn, which can be repaid immediately. The room for repayment will increase to Bt39bn in Aug 2015 as Bt16bn in debentures become callable. Assuming that CPALL sells MAKRO shares at Bt44/share (acquisition price plus carrying costs) to repay the Bt39bn at the end of 3Q15, CPALL’s stake in MAKRO will reduce to 79.4%. CPALL would then book a net divestment gain of Bt3.3bn in FY15, while interest saving would be Bt560m in FY15 and Bt2.2bn in FY16. This case would result in earnings upgrades of 21.3% in FY15 and 5.5% in FY16.