Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

Weaker-than-estimated core earnings: CPF reported a Bt4.03bn net profit for 2Q12, down by 17% YoY and 67% QoQ. There were Bt1bn (net-of-tax) in extra gains, mostly from trading CPALL stock. Stripping out the extra gains, core earnings would be Bt3.03bn—down 38% YoY but up 16% QoQ. Net profit beat our estimate by 5%, thanks to larger extra gains than modeled. Core earnings fell 7% short of our model, due to higher tax expenses at CPP and lower equity earnings from CPALL than modeled.
Results highlights: The YoY plunge was attributable to: 1) weaker domestic meat prices and overseas operations (except China and India), 2) higher interest expenses and 3) lower equity income. The QoQ rise was due to high season.
The Turkish unit posted a Bt150m net loss for 2Q12 (against a Bt300m net loss for 2Q11 and a Bt50m net profit for 1Q12) because of an oversupply of meat. Malaysia reported a Bt65m net profit, down 62% YoY, due to an outbreak of Early Mortality Syndrome (EMS) among shrimp. India posted a Bt400m net profit, up 74% YoY, led by a chicken price surge. Russia reported a Bt70m net loss, flat YoY. CPP’s 2Q12 net profit was US$55.6m, up by 67% YoY and 13% QoQ on an unrealized gain on a fair value adjustment for livestock. 
Outlook: Management expects the domestic meat oversupply to gradually diminish through to YE12 or early 2013 and a strong operational bounce in FY13. The 2H12 earnings profile remains weak, due to domestic and offshore supply surpluses (except in India and China). However, there are positive operational indicators—the Indian chicken price will improve further in 3Q12 and domestic and global shrimp prices will recover in 2H12, underpinned an outbreak of EMS disease at shrimp farms. Management targets concluding one acquisition deal by YE12.
What’s changed? In light of the weak 2H12 earnings outlook, we have cut our FY12 core profit forecast by 24% to Bt11.3bn. Our YE12 target price falls to Bt40 from Bt44.
Recommendation: We think the current share price has already factored in the unfavorable 2H12 earnings outlook. Our BUY rating stands.