Charoen Pokphand Food

Charoen Pokphand Food Plc (CPF) 

 

- 2Q15 profit remains thanks to high extraordinary profit   

CPF's 2Q15 net profit was B3.0bn, staying flat from 1Q15 and falling 15.9%yoy but 13% better than expected. However, excluding B3.0bn extraordinary profit from investment selling and Fx gain, CPF faced B53m normalized loss (much worse than expected). SG&A/Sales increased, mainly from personnel preparation for CPP's processed food business in China starting in 2H15. CPF's overall business slightly improved from 1Q15. The domestic business (41% of total income) rebounded because pork price rose (hot weather slowed down pig growth, thus lowering supply) while average live chicken price remained low like in 1Q15. The overseas business (59% of total income) stayed flat from 1Q15. 

- Core businesses rebounding in 2H15 

We maintain our earnings forecast in 2015-2016. CPF's FY2015 net profit is expected to fall 29.5%yoy because of B4.5bn extraordinary profit from investment selling booked in 2014. Excluding extraordinary items, normalized profit is still expected to drop 14.1%yoy due to the slowing economy and low domestic livestock prices. However, we expected normalized profit to advance by 80.0%yoy in 2016 since the economy would rebound and S&W's earning of B1.7bn (18.5% of our forecast in 2016) would be included in CPF's financial statement. Normalized loss in 2Q15 is projected to rebound to normalized profit in 3Q15 owing to high season and higher average domestic pork price, and then stay unchanged in 4Q15; normalized profit tends to drop in the fourth quarter, but it would be compensated by profit from S&W. 

- Share price substantially undergoes correction already, likely to outperform 

We recommend BUY. The share price has considerably reflected negative factors already, and improvement is foreseen in 2H15, so CPF is very likely to outperform the market. FY2015 fair value (1.61x PBV, close to the ten-year average) is B26. CPF will pay interim dividend at B0.30/share (1.5% dividend yield).