Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)
 

Investment thesis: We maintain our TRADING BUY rating on CPF in anticipation of a recovery in meat product prices with the normalization of meat consumption in 2Q12. We estimate flat YoY 4Q11 earnings, but we expect the firm to achieve some EPS growth in FY12, given a full quarter of CPP financial consolidation in 2Q12, the govt’s headline corporate tax rate cut to 23% for this year and bottom-line turnarounds at Turkish and Russian units.
Flat YoY profit expected for 4Q11: We estimate net earnings of Bt2.07bn for 4Q11, flat YoY and down 59% QoQ. There are two extra items for the quarter—a Bt600m deferred tax provision and a Bt300m trading gain on CPALL shares. Excluding the two items, core profit would have jumped 119% YoY but plunged 52% QoQ. The expected QoQ core earnings drop is attributable to low season for both exports and aquaculture. The YoY core profit jump was driven by: 1) a steep decline in SG&A (there were various expense adjustments in 4Q10) and 2) a shallower loss at the Turkish unit (Bt100-150m against Bt300m in 4Q10).
Flat YoY core & net earnings projected for 1Q12: We forecast a Bt3.2bn net profit for 1Q12, flattish YoY. There will be two extra items in the quarter—a gain from a revaluation of CP Vietnam’s assets and a gain from the sale of shares in Alliance CP Insurance. There will also be one month booked from the financial consolidation of CPP. We also expect flat YoY core earnings for 1Q12—our model suggests margin squeeze for domestic operations (due to lower YoY chicken and pork prices)—offset by the effect of a shallower loss at the Turkish unit.   
Weaker meat price recovery that expected: Management believes that the persisting low prices for both domestic chicken and pork are due to lower meat consumption in the wake of the 4Q11 flooding. We expect meat consumption to normalize in 2Q12.
FY12 earnings model upped 4%: We have increased our FY12 net profit forecast from Bt18bn to Bt18.8bn to factor in an 8% higher mean price assumption for domestic chicken to Bt43/kg, to be brought about by a meat consumption recovery in 2Q12. As such, our YE12 target price rises 5% to Bt37.5.