Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)
 

Investment thesis: CPF will post weak 1Q12 core earnings, due to plunges in domestic meat prices and softer overseas operations. But we anticipate a strong earnings bounce in 2Q12, led by higher pork and chicken prices ahead of the EU lifting its ban on raw chicken, a turnaround at the Turkish unit and a full quarter of CPP consolidation. The EU’s lifting of its ban on Thai raw chicken will empower the industry—bigger export volumes will mean tighter domestic supplies, so higher domestic chicken prices. We have upgraded our rating from TRADING BUY to BUY, premised on a stronger earnings in 2Q12 and beyond.
Record 1Q12 net profit, due to extra items, but … We estimate a Bt7.1bn net profit for 1Q12—up by 103% YoY and 194% QoQ and a new record. Two major extra items will be booked to 1Q12: 1) a gain from an asset revaluation of CP Vietnam (CPV) and 2) a gain from the divestment of stakes in two insurance companies. We estimate about Bt5.8bn in extra gains for the quarter.
… 1Q12 core earnings deterioration: Stripping out extra gains, core earnings would have plunged by 56% YoY and 16% QoQ, led by: 1) losses on domestic meat sales for 1-2 months and 2) softer overseas operations (except Turkey), due to lower consumption and seasonality. The Turkish unit should post only a modest net loss on a more subdued price competition. 
QoQ core profit bounce in 2Q12: Growth will be driven by a bounce in domestic meat prices (chicken and pork), high season for exports, a full quarter of CPP consolidation, a turnaround at the Turkish unit, a bigger equity contribution from CPALL and an overseas operational improvement, led by high season.
Fast chicken price recovery in April: The domestic chicken price jumped 21% last week to Bt35/kg, due to tighter supplies brought about chicken meat stocking by some exporters ahead of resumed exports to the EU in July and hot weather. The start of the new school year in mid May will tighten supplies further; we expect the price to rise above Bt40/kg.
FY12 core earnings forecast upped 7%: Our upgrade was prompted by anticipation of domestic meat price recoveries and the EU lifting its ban on Thai raw chicken in July 2012.
Outlook
Record 1Q12 net profit due to extra items: We estimate a Bt7.1bn net profit for 1Q12—up 103% YoY and 194% QoQ—a new record. Expanded expectations for extra gains prompted us to increase our projection from Bt5bn. Two major extra items will be booked in 1Q12: 1) a gain from an asset revaluation of CP Vietnam (CPV) and 2) a gain from the divestment of stakes in two insurance companies (a 24.5% stake in Alliance CP Insurance and a 3.5% stake in Ayuddhya Alliance CP Life Assurance). We estimate about Bt5.8bn in extra gains altogether. Stripping out extra gains, core earnings would have plunged by 56% YoY and 16% QoQ, led by: 1) losses on domestic meat sales for 1-2 months and 2) softer overseas operations (except Turkey), due to lower consumption and seasonality. The Turkish unit should post only a modest net loss on a more subdued price competition, against a Bt230m net loss in 1Q11 and a Bt180m net loss in 4Q11. 
The domestic chicken price fell from Bt40/kg in early Jan to Bt29/kg at end-March, the lowest level since Feb 2007, dragged down by oversupply brought about by industrywide capacity expansion in the face of domestic consumption shrinkage. The pork price tumbled from Bt63/kg in early Jan to Bt49/kg in mid March, the lowest level since Jan 2008, before rebounding to Bt58/kg at end-March, due to short-term consumption shrinkage. In 1Q12, the mean domestic chicken price dropped by 27% YoY and 13% QoQ, while the average pork price fell by 10% YoY and 12% QoQ. With regard to raw material costs, the corn price rose by 6% YoY and 7% QoQ, while the soybean meal price increased by 8% YoY and 6% QoQ. We expect the domestic chicken operation to post a net loss for March while the pork operation will report a net loss for Feb-March. GM is assumed at 12%, down from 16% in 1Q11 and 13% in 4Q11.
The consolidation of CPP started on Jan 20, 2012 when CPF purchased a 50% of the firm, followed by a second purchase of another 24.2% stake on March 8, 2012. CPP is likely to post a QoQ drop in GM for 1Q12, due to a realized loss on fair value adjustments for livestock (related to lower livestock market prices) and seasonality in Vietnam. Note that CPF hasn’t adopted the new IFRS accounting standard, which CPP uses. Hence, CPF’s livestock values are still based on the cost method, while those of CPP are marked to quarter-end market values.