Charoen Pokphand Foods

Charoen Pokphand Food Plc (CPF)
- 3Q13 earnings to recover, but not back to normal
CPF's 3Q13 net profit is projected at B2.6bn, rising 60%qoq and 9%yoy.
However, if B3bn extraordinary income from investment sale is excluded, CPF
would face B381m normalized loss, improving from B1.5bn loss in 2Q13 though.
CPF's domestic business has been recovering. Profit from livestock (35% of total
income) is likely to increase due to high season for food export, as well as rise in
livestock product prices. 3Q13 pork price has increased by 4.2%qoq to
B69.83/kg, whereas chicken price has fallen slightly by 3.6%qoq to B44.67/kg,
which is still higher than production cost. Moreover, raw material cost has
decreased; corn price has fallen by 9.3%qoq to B9.28/kg, and soybean meal
price has fallen by 4.4%qoq to B17.32/kg, boosting gross profit margin on
livestock business. This can negate loss in the shrimp business (8% of total
income) caused by shrimp disease (EMS), which has affected shrimp farmers’
confidence and hindered them from producing, even though CPF has encouraged
and participated in shrimp disease prevention. Thus, small amount of shrimps is
sold in the market. Oversea business (53% of total income) is projected to stay
flat from 2Q13. 3Q13 share of profit from affiliated companies is likely to fall by
20%, mainly due to decrease in CPALL's net profit (CPF holds 33% of CPALL's
share). Overall, 9M13 net profit is projected at B5.3bn, falling 71.5%yoy,
making up 55% of our FY2013 earnings forecast.
- To revise down CPF earnings forecast due to slow recovery in shrimp business
We might revise down CPF's FY2013-2014 net profit forecast after 3Q13
earnings report, as the shrimp business has recovered more slowly than
expected. Shrimp disease (EMS) is likely to press CPF continuously in next two
quarters, as shrimp farmers have been waiting for an effective solution on
disease from the government and private organizations. If the solution works,
shrimp farmers are likely to resume shrimp business, reviving CPF's shrimp sales
(shrimp food and processed shrimp) in 2014. Profit from livestock business
would still be high, despite decrease in livestock price (pork and chicken) from
September 2013 to present because there have been more products in the
market as livestock manufacturers have increased their production capacity to
compensate for troubled Sahafarm's capacity. However, this would not press
CPF much, as feed mill raw material cost has also decreased. Thus, CPF's profit
would remain healthy.
- Share price already reflects pressing factors. Waiting for recovery in 2014
We derive end-2013 fair value (2.2x PBV) at B32.29. As share price has
previously reflected pressing factors on FY2013 dreadful earnings results, CPF
has 29% upside. We recommend "BUY" and wait for recovery in 2014.