CP All

CP All Plc (CPALL)

Investment thesis
CPALL’s share price has dropped by 12.5% since its peak in February and by 7% since our rating downgrade. We think the stock is now a good price, so we no longer need to wait until 2Q13 (as in our previous thesis) or the announcement of slow 1Q13 earnings. Moreover, after talking with management and digging deeper into details, we see scope for CPALL to deliver faster growth than the street expects. Although it wouldn’t impact much on our earnings model in the near-term, the long-term impact could be substantial. Following our earnings forecast increase, we have raised our YE13 target price to Bt54 from Bt48.25 and upgraded our rating to BUY from HOLD.

Expansion will exceed the street estimate
As everyone knows, CPALL targets rolling out 540 stores this year and opening 550 outlets annually in FY14-18 in order to achieve its target of having 10,000 stores nationwide by YE18. The rolling out of 540-550 outlets a year translates into a six-year CAGR of only 6.8% (FY13-18), which may not look exciting, especially compared to the expansion plans of other retail firms. But in terms of sales space, the expansion should be greater, given that: 1) most new outlets will be big-format stores (120-150sq.m) versus an average of 90 sq.m and 2) the renovations of 500-600 stores each year will expand the sales spaces of most renovated stores by 33-50%. In terms of sales space, we expect a six-year CAGR of 9.3%.

The larger the store, the wider the customer target and margin
Not only do the big-format stores substantially boost sales, but they expand the target market. For example, standalone stores (140-150sq.m) that also offer small parking spaces can attract high spenders, leading to bigger basket sizes. The standalone format currently comprises 10% of total stores; that percentage is expected to gradually increase. Moreover, as the extra space at the larger stores is mainly allocated to high-margin products, such as ready-to-eat food, Kudsan bakery&coffee and eXta pharmacy corners, store margin should continue to improve.

Earnings forecast upgrades
We have revised up our FY13-18 earnings projections by 1-11%, as sales space growth and margin expansion should be faster than our previous assumptions.

Slow profit growth in 1Q13 is now behind us
We expect CPALL to post slow YoY earnings growth for 1Q13, as the impact of higher wage costs (from minimum wage increases in both April 2012 and January 2013) cannot be fully offset by a lower headline corporate income tax rate from 23% to 20% alone. However, we believe the market already expects slow profit growth for 1Q13, so now should be a time to look forward. We expect strong YoY growth to resume in 2Q13, thanks to high season for sales of food items in tandem with favorable weather and several long weekends during the quarter.