Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)   

 

- CPF faces lawsuit over fishmeal from illegal labor   

On August 19, 2015, three California law firms filed a lawsuit against CPF and Costco (U.S. major retailer), alleging that Costco did not reveal that CPF’s shrimp is fed with fishmeal produced from illegal labor. However, CPF has revealed that its fishmeal comes from certified manufacturers and legal vessels, and it has prepared documents and evidences to defend itself. 

- Only psychological effect. No actual effect on profit 

This lawsuit would only have a psychological effect, no actual effect on CPF's earnings since Costco has not halted its shrimp import from CPF yet. CPF's shrimp export to the US is worth US$2.5bn, only 0.5% of 2015 total income. Thus, for the worst-case scenario that the US stops importing shrimps from CPF, the company would not be affected significantly, and it can still export shrimp to other countries, e.g. Japan. We maintain our 2015-2016 earnings forecast. Net profit is projected to fall 19.7%yoy in 2015 as normalized profit would plunge 47.8%yoy due to the economic slowdown and low domestic livestock prices compared with 2014. Then, normalized profit is expected to leap 151.1%yoy in 2016 as the economy would recover and S&W's profit would be included in CPF's financial statement. CPF's earnings are projected to rebound from 2Q15 in 3Q15 since overseas orders would rise in food export high season (before end-year long holiday) and average domestic pork price has risen by 6.6%qoq (drought and rain in some areas weakens pork supply). 

- Price previously plunges. Good entry point 

We recommend BUY. The share price previously plunged 35%ytd, more severely than peers, substantially absorbing negative factors already. With 2015 fair value (1.48x PBV) of B24, this is a good entry point for long-term investment.