Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)  

 

- Expanding to Russia  

CPF announced its plan to acquire Severnaya and Woyskovitsy (S&W), an integrated chicken in Russia valued B24bn or US$680m with FY2014 EV/EDITDA of 6.1x and P/E 

ratio of 7.4x. CPF plans to acquire 80% total paid-up shares in S&W within 2015 first, and then acquire another 20% stake by August 31, 2018. The purpose of this acquisition is

to expand its poultry business into Russia. With chicken import at 500,000 tons/year and chicken consumption per capita as low at 26 kg/person/year, chicken consumption in 

Russia is likely to grow further. Owning 5% market share, S&W is one of the five chicken producers with the largest market share in Russia, which means S&W has a strong 

market position and has potential to become a big production base. In addition, since there is no company dominating the Russian poultry market, this is a good opportunity for CPF to expand its market, in line with the goal to increase income from the overseas business from 59% at present to 75% in 2020.

- Revise down forecast. Good growth foreseen in 2016 

We revise down CPF's earnings forecast by 6.7% in 2015 and 22.8% in 2016 to reflect higher feed mill raw material cost caused by the drought, the economic slowdown, a decline in export, and the acquisition of 80% shares in S&W; income from S&W would be included in CPF's financial statement from November 2015 on. Under the new forecast, CPF's FY2015 net profit is expected to drop 29.5%yoy because B4.5bn extraordinary profit from investment selling was booked in 2014; normalized profit is also projected to fall 14.1%yoy due to the economic slowdown and lower domestic livestock product prices. However, normalized profit is projected to leap 80.0%yoy in 2016 since CPF would recognize profit from S&W of around B1.7bn and domestic livestock product prices would rise. 

- New fair value is B26 

Under the new forecast, the fair value is revised down from B28 (1.70x PBV) to B26 (1.61x PBV, close to the ten-year average), still showing a high upside. CPF's earnings are projected to make the year's peak in 3Q15. We reiterate BUY.