CP All

CP All Plc (CPALL)

Investment thesis
Although we maintain our BUY rating on CPALL with a YE14 target price of Bt47.50, we believe investors may need to wait a bit. Good timing for taking overweight positions in the stock would be late 4Q13, at which point earnings should have bottomed out and the uncertainties surrounding refinancing issues resolved. The key matter to monitor in the short-term is the refinancing of the bridging loan, which could make for either upside or downside to our current model.
Uncertainties are starting to clear
Two issues that have pressured CPALL share price in recent months—FX exposure and uncertainties over interest costs after refinancing—will soon be resolved. In October, the firm will refinance a US$5.8bn (Bt182bn) bridging loan by issuing Bt90bn in baht-denominated debentures with maturities ranging three, five, seven and 10 years; the remainder will be refinanced with long-term bank loans, expected to be completed by YE13. After refinancing, interest costs will be fixed and FX risk will disappear, so those uncertainties will no longer weigh on earnings forecasts.
Upside and downside to estimates
Based on CPALL's credit rating (Fitch A+), its debentures should have coupon rates ranging 4.25-5.5%, depending on tenure, while the term loans should have interest rates of MLR-1.5% to MLR-2%. Under our base-case scenario, we assume average interest rates of 5% for debentures and 5.25% for long-term loans. Our sensitivity analysis suggests that for every 25 bps the average interest rate differs from our base-case assumption, our FY14 earnings estimate would change by 2.7% (Figure 1).
We believe there is more likelihood of upside than of downside to our earnings forecasts, as the majority of the debentures will probably be of short-term tenures. Note that HMPRO, which has the same credit rating as CPALL, recently issued a 3-year debenture with a coupon rate of 4.05%.
After the storm
After earnings bottom out 2H13 and uncertainties surrounding refinancing are cleared up, we believe the street will look to synergy-building tied to integrating the MAKRO operation. This should make for major upside to the consensus forecast, as the street currently seems to be skeptical of the scope for synergy creation. Moreover, we believe that plain vanilla benefits, such as pooling purchases, will be greater than the market expects.
For example, we previously thought synergies from pooling orders between CPALL and MAKRO would be only minimal, due to different pack sizes. But, in fact, MAKRO also sells many small pack sizes, but as bundled single packages. MAKRO and CPALL are compiling a list of products over which they could negotiate jointly with suppliers for better prices. The negotiations should be completed by early 2014; the benefits from better commercial trade terms would start manifesting thereafter.