Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)
1H13 recap. 1H13 was sad, with a pure core operating loss of Bt5.05bn (not including
CPALL’s contribution) – despite Bt2.6bn contribution from subsidiaries – on revenue of
Bt180.6bn, +9%. Gross margin was poor at 8.8% vs. 13.6% in 1H12 and operating margin
was 0.5% vs. 6.1% in 1H12. Net profit was Bt2.7bn, -84% YoY, with extras from
divestment and dividends of Bt5.2bn. 1H13 was challenged by the deep impact of EMS
in Asia’s shrimp industry, especially Thailand. The Thai shrimp business thus had a gross
margin of -3.0% in 1H13 vs. 23% in 1H12 with an operating margin of -10.6% vs. 18.2% in
1H12. Overseas, the shrimp business reported a gross margin of 3.74% with an
operating margin of -3.8% vs. 11.9% and 6.8% in 1H12 respectively, indicating a more
rapid recovery from EMS in China, Malaysia, and Vietnam. Livestock prices abroad were
pressured in 1H13, hurt by the H7N9 influenza virus in China (indirect effect on the feed
business) and Vietnam (direct effect on both farm and feed businesses).
2H13F. Thailand’s livestock business looks a lot better in the second half, with prices of
broiler and swine products continuing to climb each month and broiler sales volumes
in 3Q13 expected to be the year’s highest, as it is the high season for exports. Prices for
major raw materials soybean meal and corn are also expected to decline QoQ,
although soybean meal showed a short term price rise in June-August 2013 (latest
price was Bt18/kg). However, this was offset by the continued fall in corn price (latest
price was less than Bt10/kg). The shrimp business continues to look limp in 3Q13 and
we expect the same level of loss with a negative EBITDA of Bt1bn. Livestock is expected
to contribute a profit of ~Bt3bn, compensating for losses from shrimp. Profit
contribution from CPALL in 3Q13 is also expected to be low at ~Bt900mn, due to the
low season for commerce and huge expenses from acquiring MAKRO.
Still Buy, with TP of Bt35. We expect little contribution from CPALL in 2013 at
Bt4.3bn, +4% YoY. We maintain 2014F EPS at Bt2.48/share. We base our target price on
PER of 14x in 2014 to factor in its larger business operations and the onset of an
upcycle. Livestock prices are climbing back up while raw material prices are dropping
from last year’s peak, underwriting the turnaround. We like CPF, with its feed business
expansion into China under CPP that will lift that country’s food business standards to
world class. Currently the government is exerting more control over feedmills in China
and this has slashed the number from 15,000 to 10,000 – helping reduce excess supply
and a plus for CPP, 74% held by CPF. Another plus is the acquisition of CP-Meiji in
furtherance of its goal of becoming a dairy export base in Asia. It is also buying a swine
business in Russia via a tender offer to acquire 67-88% in RBPI, which will give it a
shortcut to expanding in Russia. With these positives lighting up the dim present, we
still BUY with a TP of Bt35/share.