Charoen Pokphand Food
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Sales of investment in CPP to strengthen capital base HOLD
Charoen Pokphand Food Plc (CPF)
We have a positive outlook that the sales of investment in CPP
would strengthen CPF's capital base. End-2014 D/E ratio is expected
to drop below 1x, in line with CPF's target.
- CPF sells investment in CPP
CPF has approved to sell 6.02 billion shares of CPP to ITOCHU at
HKD1.1/share, totaling HKD6.62bn (or B27.4bn). The sell of investment is
preliminarily expected to be completed in September 2014. After completion
of the transaction, CPF's shareholding in CPP would decrease from 74.18%
to 50.43% of CCP’s total paid-up share capital.
- Stronger capital base
We have a positive outlook on the sales of investment. As CPF previously
acquired CPP in late-2011 at HKD0.9/share, it would gain B4.15bn profit
from the sales of investment (booked in the shareholders' equity of the
consolidated financial statement); the profit would be used on debt
repayment (in line with CPF's plan). End-2014 D/E ratio is expected to
decrease from 1.30x to 0.92x. However, as a result of the disposal of
investment, we slash CPF's earnings by 1.2% in 2014 and 3.7% in 2015
(under the assumption that the transaction is completed at the end of
3Q14); B1.5bn profit from CPP would be excluded from CPF's FY2014-2015
earnings, thus negating benefit from a decrease in interest expense. Under
the new forecast, CPF's net profit is estimated to grow by 32.1%yoy in 2014
and 31.9%yoy in 2015.
- New fair value is B29
Under the new forecast, end-2014 BVS is expected to rise by 3.6% as a
result of B4.15bn profit from sales of investment. Thus, FY2014 fair value is
revised up from B28 to B29 (GGM, 1.80x PBV, 15.8% long-term ROE),
granting only 5.2% upside from the current share price. We recommend
HOLD for dividend.
