CPALL

Over the past three months, CPALL’s share price has underperformed its sector by 6% and the SET by 14%, responding to four quarters of earnings erosion brought by sluggish consumption and the huge fees and interest expenses from the MAKRO deal recorded since 3Q13. This, however, ignores the fact that CPALL is turning in the sector’s best earnings growth in 2H14, with recovery in SSS growth, store and margin expansion and importantly, no more extra financing costs. We expect it to exhibit the sector’s best 3-year EPS growth of 25%. BUY with PT at Bt58.

Share price underperformance reflects weaker earnings. Over the past three months, CPALL share price fell 7%, 6% worse than its sector and 14% worse than the SET, in response to four quarters of deteriorating earnings, hit by sluggish consumption but mostly by the booking of the large fees and interest expenses related to the MAKRO deal beginning in 3Q13 and extending to 2Q14. 

-- But this ignores its lead position in 2H14 and LT earnings. The market is ignoring CPALL’s strengthening earnings ahead to where it will beat its sector with core earnings growth of 27% YoY (vs. the sector’s +11% YoY) in 2H14F. Without the additional burden of financing costs from the MAKRO deal (the same base YoY), CPALL’s earnings will grow from recovery in SSS growth, more stores and wider margin. Its SSS growth will revive from -0.6% YoY in 1H14 upon the better climate overall in the country and the return of its very popular stamp promotion running from late July to November. Its gross margin will widen from a better product mix and business synergy with MAKRO. Of all retailers in 2014, only CPALL and MAKRO are adding more stores than originally planned, to achieve close to 700 stores for CPALL (vs. target of 600 in early 2014) and 13 stores for MAKRO (vs. target of six in early 2014). We expect CPALL to deliver the sector’s best three-year EPS growth of 25% (vs. the sector’s 20%) through 2016, backed by the better SSS growth, better margin, continued store expansion and lower financing costs from deleveraging.

Debt refinancing completed: no more FX risk, lower funding cost and risk from rate hike. In late Aug 2014, CPALL issued new debentures of Bt40bn, at average cost of funds of 4.6%, to refinance its long-term loans. This allowed it to close its entire position in US$-denominated loans (from 6% in early Aug and 100% in 3Q13), implying no more FX risk ahead. CPALL also raised its portion of fixed-rate liabilities to 72% (vs. 50% in early Aug 2014 and 0% in 3Q13), reducing the risk from higher financing costs if rates are raised in 2015F. By our estimates, 2015 net profit will be pulled up by 2% simply by refinancing to reduce cost of funds. Of total LT liabilities of Bt180bn, Bt130bn is in debentures (tenor of 3-10 years; fixed rate at ~4.7%) and the remaining in LT loans (tenor of 7 years; floating rate at ~5-6%). 

BUY. We BUY CPALL with mid-2015 DCF PT of Bt58 based on WACC of 9.3% and growth rate of 3%. Key risks are: 1) changes in SSS growth and store expansion; 2) changes in staff and utilities costs; 3) negotiations with suppliers on rebates; 4) competition.