CPALL

CPALL Plc

- 3Q13 profit affected by MAKRO acquisition for first quarter, but better than expected
CPALL's 3Q13 profit was B2.660bn, staying flat qoq and falling 8.4%yoy (17%
better than the consensus). This is the first quarter that MAKRO's earnings result
was included in CPALL's financial statement (CPALL holding 67.15% stake in
MAKRO from early-3Q13 to 8 August, holding 99.78% afterward). B1bn profit
from MAKRO is booked, as well as B2bn (US$5.8bn loan debt) financial cost
before tax from MAKRO acquisition (recognized as SG&A and financial cost) and
B391m Fx loss. Normalized profit from core business was still strong, as samestore-
sales rose by 4.6%yoy due to successful stamps sales promotion. Gross
margin increased by 230bps due to a change of accounting method for phone
card, from booking in sales and cost (low margin) to other incomes. Excluding the
change, gross margin rose by 10 bps, slightly lower than usual, due to sales
promotion that focused on personal care products. SG&A/Sales rose 360 bps from
3Q12 due to effect from financial cost.
- To revise down FY2013-2014 earnings forecast. Interest expense above expectation
CPALL has probably passed its low. The profit is likely to recover in 4Q13, partially
due to profit from the subsidiary MAKRO, making the year's highest. Moreover, Fx
loss would decrease significantly, as CPALL has gradually refinanced USD loan
issuance into THB via the first issue of bonds in late-October, which have positive
feedback and can be sold higher than the former target, from B40bn to B50bn
(28% of total debt). The next issue of bond will be sold in 1H14 at B90bn, as
approved by shareholders (4.8% average interest rate). Another B90bn will be
borrowed from bank, of which the interest rate is slightly higher than bond (5.25-
5.5%, based on 1.75%/2% MLR). If CPALL can issue more bonds than expected,
financial cost would be lower (every 10 bps from interest increase presses 1% of
net profit). Thus, we revise down FY2013-2014 by 4% and 9%, respectively.
Conservatively, interest rate would increase from 4.3% in the previous revision to
5.2% (higher than expected at 5%), including 2Q13 Fx loss. Under new
consumption, FY2013 is likely to stay flat from FY2012, but FY2014 is projected to
leap by 27%yoy, as CPALL will benefit more from MAKRO acquisition. As the first
benefit, CPALL saves B200m/year from trademark and software, as MAKRO needs
to pay to CPALL (included in CPALL's financial statement) instead of the former
major shareholder (SHV). Other benefit from MAKRO will be booked in 2014.
- Share price reflects pressing factors already. Limited downside.To improve from now on

Previously underperforming share price has reflected pressing pressure. CPALL's
earnings has passed the lowest, likely to rebound from now on, possibly
outperforming. We revise down CPALL's earnings forecast but derive FY2014 fair
value (9.5% WACC, 2.4% TV Growth) at B53. Thus, we reiterate "BUY".