Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)  

Investment thesis

We believe that investors have already skipped past expectations of weak 4Q14-1Q15 earnings (squeezed by low season, a slow shrimp recovery, heavier losses at the Russian unit and declining livestock prices). The FY15 profit drivers are a shallower shrimp unit loss, fatter livestock margins (due to lower raw material prices) and turnarounds at some overseas units. There would be scope for upside in 1H15 from the acquisition of a foreign downstream food firm. 

Insights into 4Q14—a moderate YoY core profit rise  

A Bt1.8bn bottom-line is expected for 4Q14, up 3% YoY but down 57% QoQ. Stripping out extra items—FX and a trading gain on CPALL shares—we assume a Bt470m core profit, up 13% YoY but down 84% QoQ. The new core profit estimate is far below our previous forecast of Bt1.2bn, due to a deep FX loss tied to a sharply lower ruble (Russian unit) and a slower Thai shrimp unit recovery than earlier assumed. 

The driver of the expected YoY core profit rise was a shallower loss at the Thai shrimp unit and improved numbers at overseas units, led by Turkey and India. The modeled QoQ tumble was because of low season, seasonally high expenses and a deeper loss in Russia (FX and a higher interest rate). CPF will fully recognize its reduced stake in CPP to 50.4% in 4Q14. Other overseas aquaculture units will post seasonal QoQ earnings drops. Thai livestock margin will be reported stable YoY but down QoQ (squeezed by QoQ price drops of 14% for pork and 7% for chicken).    

Slow Thai shrimp recovery in 4Q14 

The Thai shrimp unit will post a Bt900m operating loss for 4Q14, shallower by 22% YoY but seasonally deeper by 99% QoQ. The shrimp unit recovery is proving weaker than we had earlier anticipated. We expect stronger numbers for the unit, 2Q15 through 2H15. The shrimp operating loss should ease to Bt1bn in FY15 (from a Bt3.5bn loss in FY14), led by greater industry-wide shrimp output (280-300k tonnes/ annum in 2015 against 200-220k tonnes/annum in 2014). Note that the first- and fourth-quarter are low season for the aquaculture business.

FY14-15 earnings forecast cuts, due to slow shrimp recovery 

We have cut our net profit projections by 6% for FY14 to Bt11.5bn and by 7% for FY15 to Bt15.3bn to factor in a slower shrimp recovery than earlier assumed. We now forecast a shrimp operating loss of Bt1bn in FY15 (we previously modeled for operational break-even for FY15). As such, our DDM-based YE15 target price declines 5% to Bt40. The macro risk factors to watch in 1H15 are consumption spending trends and currency fluctuations.