Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)  

 

Investment thesis

Despite the FY15 earnings cut due to its diminished export sales, we reiterate our BUY rating on CPF in anticipation of a strong 2H15 earnings recovery led by overseas units, shallower losses on Thai shrimp and some export sales recovery. We believe that the share price weakness has already factored in the weak 1H15 earnings.  

Insights into 2Q15—a YoY core profit drop 

We estimate a Bt2.25bn net profit for 2Q15, down 37% YoY and 24% QoQ. Stripping out the trading gain on CPALL shares (net of tax) and FX, we assume a Bt1bn 2Q15 core profit, down 65% YoY but up 72% QoQ. The YoY plunge is led by weaker domestic livestock margins, lower export volumes of shrimp and chicken (the weaker currencies of importing countries), lower domestic food sales (weaker consumption climate) and deeper loss at its Turkish unit. The QoQ jump is thanks to the high season for exports, the greater pork margin, shallower Thai shrimp loss and bottom-line gains at overseas units apart from Turkey. 

We estimate a GM of 12.8% in 2Q15, against 14.5% in 2Q14 and 12.5% in 1Q15. We estimate that its Turkish unit will post a Bt200m net loss in 2Q15, 233% YoY deeper in the red and against break-even in 1Q15, led by lower export volume to the Middle East and a price tumble due to oversupply. We expect a Bt600m Thai shrimp operating loss in 2Q15, 46% YoY and 29% QoQ shallower. 

Diminished export volume expectations for 2Q15

The deep devaluations in the yen and the euro against the USD have continued to make Thai exports (including CPF’s) more expensive when clients pay in USD and resulted in export volume shrinkage. Importing countries’ clients have started to bargain down prices in 2Q15 amid their weak currency climates. Because 1H15 sales declined 2% YoY, the 5-10% sales target for FY15 appears difficult to achieve. 

No impact from new fishery regulations

CPF clarifies that the strict imposition of local fishery regulations under the unreported and unregulated (IUU) fishing protocol enforced by the EU to register all fishing operators will have no impact on CPF because it buys fishmeal (a raw material for shrimp feed) directly from licensed plants, which continue to source product from registered fishing boats. 

Further cuts to our FY15 net and core earnings 

We cut our FY15 net and core profit forecasts by 25% (to Bt9.43bn) and by 34% (to Bt6.32bn), respectively, to reflect the weaker-than-assumed export sales volume and sales prices. We cut the export sales volume and sales prices for chicken and shrimp 10-15% and 5-10%, respectively. Our DDM-based target price falls 14% (to Bt30).