CPALL

CPALL Plc  

CPALL is our sector’s top buy. Our choice is determined by several factors: 1) A better 4Q14F (+15% YoY) without any more FX loss and better margin, both of which offset the weak SSS growth; 2) solid 1H15F earnings growth (low base in 1H14 from weak SSS from cold weather and curfew and high expenses from MAKRO deal); 3) the sector’s best 2015-16 earnings growth at 37% p.a.; 4) underperformance relative to the SET at -9% over the past 3 months. We maintain BUY with an end-15 DCF PT at Bt57. 

4Q14 earnings, up YoY but down QoQ. We estimate net profit of Bt2.4bn, +15% YoY but -9% QoQ from seasonality. The improvement YoY reflects mainly the absence of FX loss of Bt147mn recorded in 4Q13 and better EBIT margin offsetting the negative SSS growth. We expect CPALL to report SSS growth of -2% YoY vs +1.5% in 4Q13 and -4.5% in 3Q14, as customers shrugged off its July-November stamp campaign, with SSS then growth returning to positive in Dec 2014. We estimate CPALL added 135 new stores in 4Q14F, raising its store count to 8,100 (+9% YoY and +2% QoQ). We estimated a rise in EBIT margin to 5.8%, +1.4% YoY, from higher gross margin from both types of stores: convenience stores thanks to high-margin food products, and cash and carry (MAKRO) thanks to greater sales to the high-margin HoReCa segment and lower expense related to the MAKRO deal. CPALL will release its 4Q14 results on 17 Feb.  

More improvement ahead. In 1H15, we expect CPALL to report more earnings improvement off last year’s low base generated by weak SSS growth of -0.3% (unusually lengthy cool weather and curfew), plus the high fee expenses from the purchase of MAKRO. In 2015-16, we expect CPALL to continue to exhibit the sector’s highest 2-year EPS growth of 37% p.a., backed by a return to SSS growth (+5% YoY in 2015-16F vs -1.8% YoY in 2014), better margin (+20-30bps p.a. mainly on organic margin improvement), continued store expansion (+600 stores p.a.), and the completion of recording the expenses created by the acquisition of MAKRO.  

Maintain BUY. We maintain BUY with unchanged end-2015 DCF PT of Bt57. We see this as a good opportunity to accumulate, with its stock underperforming the SET by  -9% over the past three months against better 4Q14F earnings, improving 1H15F earnings and the sector’s best 2015-16 growth of 37% p.a. Earnings upside may be provided by more rapid deleveraging than anticipated. Each Bt10bn repayment of the principal of its LT liabilities of Bt180bn would reduce interest expenses and raise our earnings by 3%. Key risks include changes in SSS growth and margin, execution of store expansion and competition.