Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF)

CPF was previously affected by pressure from human trafficking
issue and feed mill raw material cost hike. Though the pressure has
currently subsided, the share price still has a limited upside

- 2Q14 net profit to surge 42.3%qoq
We estimate CPF's 2Q14 net profit at B2.92bn, increasing 42.3%qoq and
78.3%yoy. Excluding B500m extraordinary from selling of investment, 2Q14
normalized profit is projected at B2.42bn, growing 28.4%qoq due to the
following factors: 1) For domestic livestock business (30% of total income),
gross margin is expected to improve significantly. Pork price has risen by
8%qoq, while its feed mill raw material cost is likely to stay unchanged
thanks to inexpensive feed stock from early-2014. 2) Livestock business in
Vietnam (14% of total income) is projected to revive outstandingly.
Oversupply problem has subsided, so pork and chicken prices have
increased beyond the production cost. Similarly, shrimp business has also
recovered continuously after EMS receded.
- Maintain forecast. Limited downside
We maintain our FY2014-2015 earnings forecast. Initially, FY2014 earnings
forecast showed downside because major international retailers have
temporarily stopped importing goods from CPF. However, Carrefour has
recently acknowledged CPF's explanation and resumed purchasing its
goods; other customers are likely to resume buying its products as well. In
addition, feed mill raw material cost has declined; worldwide feed
undersupply problem has subsided because more corn and soybean mill
from the US have been sold in the market. Still, we are concerned about
weather and feed production in South America (e.g. Brazil and Argentina);
drought will decrease feed supply and raise feed mill raw material cost
worldwide.
- Share price has limited upside
We recommend HOLD for dividend. FY2014 fair value (GGM, 1.80x PBV,
15.8% long-term ROE) of B28 implies limited upside.