CPALL

CPALL Plc

 

SSS was slightly positive in April (vs. +0.3% in 1Q15 and +0.5% in 2Q14) as the heat drove thirsty consumers to its stores. It stands by its 2015 target SSS growth of 3-4% with 600-700 new stores. Margin will improve further from lower transportation costs and no more fees for the MAKRO deal. Interest expenses will come down after refinancing debt at lower cost. Combined, these factors mean CPALL is poised to again report the sector’s best earnings improvement in 2Q15F, as it did in 1Q15. We keep it as the sector’s top BUY with a PT of Bt54. 

Improving SSS and continued expansion. SSS was slightly positive in April 2015 (vs. +0.3% in 1Q15 and +0.5% in 2Q14), as the scorching heat drove thirsty consumers to its stores. SSS was positive for both food (72% of sales) and non-food (28%) products. CPALL maintains its 2015F SSS target growth at 3-4%, expecting more improvement in 2H15F off last year’s stamp promotion flop (4% of SSS in 2H14). Store expansion goal stays at adding 600-700 stores in 2015 (vs. 207 stores in 1Q15), moving to reach 10,000 stores within 2018.   

Margin expansion. In 1Q15, convenience store gross margin expanded 30bps YoY. This came from lower logistics costs from lower oil price and better distribution center (DC) management with no change in margin contribution from its product mix. This should continue through 2Q15. SG&A expenses are heading down as it moves past the fees related to MAKRO, with some added benefit on lower electricity cost in 2Q15. 

Lower cost of funds via refinancing. Of its Bt180bn in LT liabilities for the MAKRO deal, Bt160bn was refinanced by debentures at an average interest rate of 4.56% (fixed rate) and Bt20bn in the form of LT loans with average interest rate of 5-6% (floating). It plans to issue more debentures to refinance the remaining LT loans to gain from the low interest rates. By our estimates, its low-rate debt refinancing will give an effective interest rate of 4.7% in 2Q15F, down from 4.9% in 1Q15 and 5.1% in 4Q14.  

Partial sale of its MAKRO stake soon. CPALL says progress on MAKRO’s first overseas investment in Myanmar will be seen in early 2016. With its stake in MAKRO now at 97.88%, CPALL is considering selling some shares to raise free float. These would be priced above its acquisition and carrying costs. There is as yet no timeline or amount to be sold. With the funds gained from the sale, it would pay down debt. By our calculations, each Bt10bn repayment of the principal of its LT liabilities of Bt180bn would cut interest expenses and raise our earnings by 3%. 

Maintain BUY with DCF PT of Bt54. CPALL led the sector in earnings growth at 36% YoY (vs. the sector’s 22% YoY) in 1Q15 and we expect this to continue in 2Q15, backed by: 1) SSS revival from better beverage sales during the hot season; 2) continued margin improvement (lower transportation cost) and diminishing SG&A related to the MAKRO deal (recorded in 3Q13-2Q14); 3) lower interest expenses as it continues to refinance to take advantage of the fall in interest rates. CPALL is expected to have the sector’s best 2-year EPS growth at 30% p.a. Key risks include changes in SSS growth and margin, store expansion and competition.