Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

 

We expect CPF to report outstanding 1Q16F net profit of Bt2.4bn, -20% YoY but +53% QoQ. Excluding extra gains of Bt1bn, 1Q16F core profit will be Bt1.4bn, +92% YoY and turning from a loss of Bt133mn in 4Q15, backed by wider margin on livestock and aquatic units in Thailand, more contribution from a business bought in Russia in Dec 2015, and higher equity contribution from CPALL. We like CPF for its robust 1Q16F and even stronger 2Q16F earnings (off last year’s low base and seasonality). BUY with end-2016 SOTP PT of Bt30.  

Positive developments in 1Q16. In 1Q16, broiler and swine spreads (prices minus feed costs) widened by 14% YoY and 28% YoY respectively off 1Q15’s low base, thanks to better product prices after supply underwent adjustment, plus lower feed costs. In 1Q16, prices averaged Bt37/kg (flat YoY) for broilers and Bt67/kg (+8% YoY) for swine against lower corn and soybean costs of Bt8.8/kg (-8% YoY) and Bt16.7/kg (-10% YoY) respectively. CPF estimates the lower feed costs reduced total production costs for broilers to Bt34/kg and swine to Bt58-59/kg and turned its Thailand livestock unit back into profit in 1Q16F from the loss in 1Q15. Local shrimp sales volume continued to improve, backed by more successful shrimp farming after the EMS crisis. This, together with a rise in shrimp price to Bt185/kg in 1Q16 (+2% YoY) after a disease outbreak in India and Vietnam is encouraging shrimp farmers to bump up their volume. 

Expect 1Q16F net profit of Bt2.4bn, -20% YoY but +53% QoQ. We estimate extra gain from securities trading of Bt1bn in 1Q16F (vs. gain on securities trading and sale of land of Bt2.2bn in 1Q15 and gain on securities trading and the change in fair value of biological assets of Bt1.7bn in 4Q15). Excluding this gives a normalized 1Q16F profit of Bt1.4bn, +92% YoY and turning up from a loss of Bt133mn in 4Q15. Underwriting the improvement is: 1) wider margin on livestock and aquatic businesses in tandem with higher prices, lower feed costs, and better volume in Thailand; 2) more contribution from overseas after it bought a poultry business in Russia in Dec 2015; 3) higher equity contribution from CPALL (+18% YoY), on greater convenience store profit and lower funding costs. Of its 92% core earnings growth in 1Q16F, about 30% will come from the Russian acquisition, 30% from greater contribution from CPALL and the rest from its own core operational improvement. It will release results on May 11. 

CPF expects 2016 to be better all around. CPF targets 2016F sales growth of 10-15% YoY, backed by a revival of livestock sales after 2015’s oversupply, better shrimp sales, a full-year contribution from its recent purchases in Cambodia (2Q15) and Russia (Dec 15), with relatively stable sales from CPP HK (operations in China and Vietnam). In 2016F, CPF targets improvement in gross margin from Thailand operations in livestock to 14-15% (from 12.7% in 2015) and in aquatic units of above 10% (vs. 6% in 2015), with continued healthy margin at CPP HK. CPF plans to reduce SG&A/sales to 10-11% in 2016F from 11.1% in 2015, as higher sales will outpace higher expenses from downsizing farm business in Turkey and India. To date, the drought in Thailand has not affected its feed and livestock businesses.