Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)

- Core business rebounds as expected
1Q14 net profit was reported at B2bn, growing 16.8%qoq and
99.7%yoy. Excluding extraordinary items (B518m extraordinary
profit from selling of investment and B106 Fx loss), 1Q14
normalized profit was B1.9bn, significantly rebounding from
normalized loss in 4Q13 thanks to the following factors: 1) Domestic
livestock business improved because pork and chicken prices rose
by 12%qoq while feed mill raw material cost was low owing to
inexpensive feed stock from late-2013, boosting profit margin.
Shrimp business still faced loss. Though shrimp farmers could deal
with EMS, small amount of shrimp business was grown and sold in
the market due to low season (unfavorable weather). 2) Overseas
business improved qoq, especially livestock business in Vietnam, as
the oversupply problem had receded. 3) Share of profit from
associated companies grown by 30%qoq, mainly from CPALL's
increasing profit. Overall, CPF's 1Q14 net profit made up 19% of
FY2014 earnings forecast.
- Revise down FY2014-2015 earnings forecast
We revise down CPF's earnings forecast by 14.7% in 2014 and
12.5% in 2015. Feed mill raw material cost has been rising higher
than expected. Smaller amount of corn and soybean meal products
has been sold in the market as a result of worldwide unfavorable
weather for feed production. Corn price has leapt by 24% from end-
2013, and soybean meal price has risen by 4%qoq. Thus, CPF would
suffer high risk as corn and soybean meal cost makes up 40% and
24% of its raw material cost, respectively. Thanks to its inexpensive
feed stock from late-2013, 1Q14 earnings result was not affected by
this negative factor. However, it would threaten CPF's net profit in
the next two or three quarters, and 2Q14 - 4Q14 gross margin
would drop from 1Q14.
- New fair value is B28
After the down revision, new FY2014 fair value (GGM, 1.80x PBV,
15.8% long-term ROE) of B28 implies limited upside. We
recommend holding for dividend.