Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

 What’s new? A drought in the US Midwest has hit crop yields—particularly corn and soybean—and caused a grain prices to surge. The soybean price jumped to US$15.96/bushel on July 18, up by 11% MTD and 32% YTD and a four-year high. The corn price rose to US$7.73  /bushel on July 18, up by 18% MTD and 20% YTD and an 11-month high.
Tighter corn and soybean supplies: Corn production in Argentina fell short of expectations. US corn output dropped to its lowest level in three years, while the 2011/12 US corn stocks-to-use ratio dived to near a record low. Global corn inventories are also short. The 2011/12 US soybean stocks-to-use ratio also near a record low, due to diminished South American production in the face of greater US demand.
Modest risk of higher 2H12 SBM price: Thailand is a soybean importer. The global soybean price uptrend will increase costs for livestock farms. CPF currently imports 70% of its SBM directly and buys the rest from domestic operators. It has locked in SBM at levels 5-10% below market prices (or Bt14.5-15/kg) through to YE12. The global corn price uptrend isn’t of much concern at this stage, as CPF sources all its corn domestically. Also, the corn price will retreat during the third-quarter harvest season. In any case, CPF has stockpiled corn sufficient to last to YE12. Its overseas units source 90-95% of their raw materials locally. 
In line with assumptions: We assume mean corn prices of Bt10.6/kg for FY12 (up 10%) and Bt11.1/kg for FY13 (up 5%) and average SBM prices of Bt15.8/kg for FY12 (up 17%) and Bt16.6/kg for FY13 (up 5%). Those assumptions are in line with the YTD prices of Bt10.4/kg for corn and Bt15.5/kg for SBM. Our sensitivity analysis suggests that Bt1/kg changes in the prices of corn and soybean would impact CPF’s bottom-line by 4% and 2%, respectively.
Action: Despite the negative implications of higher raw material prices, we aren’t very concerned at the moment—CPF has considerable stocks. In any case, we expect a meat price recovery in 4Q12. Our BUY rating stands.
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