Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)
- 3Q13 net profit recovers as expected. Strong livestock business negates loss from shrimp business
CPF's 3Q13 net profit was B2.6bn, growing 61.9%qoq and 10.2%yoy, close to
our projection. Excluding B1.3bn extraordinary income from investment sale
(lower than expected, dropping from B3bn in 2Q13), CPF's normalized income
revived to B887m (better than expected), making the first normalized income in
four quarters. Earnings from livestock business (81% of total income) was
prosperous, especially in Thailand, due to high season for food export and a rise
in 3Q13 livestock price; pork price increased by 4.2%qoq to B69.83/kg, whereas
chicken price fell slightly by 3.6%qoq to B44.67/kg. Meanwhile, feed mill raw
material cost decreased; corn price decreased by 9.3%qoq to B9.28/kg, and
soybean meal price dropped by 4.4%qoq to B17.32/kg. Thus, 3Q13 net margin
from livestock business was high, totally negating loss in the shrimp business
(19% of total income) caused by shrimp disease (EMS). Moreover, share of
profit from associated companies in 3Q13 was B1.3bn, growing 8%qoq (better
than expected) due to an increase in CPALL's net profit (CPF holding 33%
stake), as profit from MAKRO was booked for the first quarter. Overall, 9M13 net
profit was B5.3bn, falling 71.4%yoy, making up 56% of our FY2013 earnings
forecast.
- Revise down FY2013-2014 forecast, but profit to rebound in 2014
We revise down CPF's FY2013-2014 net profit forecast by 14.6% and 23.2%. We
mainly cut shrimp sales that we had previously overestimated because an
impact from EMS was greater than expected and additional expense on
prevention would decrease CPF's gross profit margin far below our projection.
Under a new forecast, FY2013 net profit is projected to contract by 57%yoy, but
likely to rebound 29%yoy in 2014, due to the following: 1) Domestic shrimp
business is likely to recover gradually. 2014 shrimp product in the market is
likely to increase by 27% after shrimp farmers have more confidence on EMS
prevention and resume shrimp farming. Despite the risk, shrimp business is
likely to have high return due to attractive price. 2) Livestock business is likely
to prosper, as oversupply problem has been solved and feed mill raw material
price has been declining due to higher supply. Moreover, CPF would have better
control on expenses to make net debt to equity ratio below 1x (from 1.2x in
end-9M13). CPF would decrease shareholding in CPP (acquired since late-2011)
and sell treasury stock, which would preliminarily take six months for preferable
sale price to reflect the actual earnings result.
- New fair value is B33.63, implying 39% upside. "BUY"
Under the new forecast, new end-2014 fair value (GGM, 2.18x PBV) is at B33.63
(from 34.30). Current share price has 39% upside. We reiterate "BUY" and wait
for recovery in 2014.