CPALL

Charoen Pokphand Food Plc (CPF)   

 

This year’s stamp campaign is proving far more popular than last year’s and CPALL expects it to lift SSS growth to 1-3% in 2H15 from 0.7% in 1H15 and -4% in 2H14. It stands by its 2015 expansion target of 600-700 new stores. Margin will widen from lower transportation and utility costs. Interest expenses will drop after refinancing debt at lower cost. All told, this positions CPALL to again lead the sector in core earnings growth in 2H15F. It stays as the sector’s top BUY with a DCF PT of Bt58. 

Better SSS and continued expansion. CPALL decided to theme its stamp campaign this year (Jul-Nov) with the popular rilakkuma cartoon characters. This has met with much better response than last year’s AEC characters, as seen in the slightly better SSS growth so far in 3Q15. In 2H15, CPALL expects SSS to grow 1-3% (vs. 0.7% in 1H15 and  -4.1% in 2H14). Expansion goal stays at adding 600-700 stores in 2015 (vs. 342 stores in 1H15), moving to reach 10,000 stores within 2018.   

Margin improvement. In 1H15, convenience store gross margin expanded 20bps YoY on the drop in logistics costs from lower oil price and unchanged margin contribution from its product mix. This should continue through 2H15. SG&A expenses will be controllable as the expenses from store expansion will offset by lower utilities cost. 

LT plan. Over the next few years, CPALL plans to enhance its SSS and margin by a greater expansion in chilled food, fresh coffee, and health & beauty and bakery products to cover the majority of its stores. It will open more standalones with more parking (14% of stores) to serve the rising number of car owners. Larger stores mean it can have space to sell and stock all its best-selling products.  

Lower cost of funds. Of its Bt180bn in LT liabilities for the MAKRO deal, Bt173bn was refinanced by debentures during Oct 2013-Jun 2015 at an average interest rate of 4.5% (fixed rate) and the rest in the form of LT loans with average interest rate of 5-6% (floating). By our estimates, its low-rate debt refinancing will give an effective interest rate of 4.6% in 3Q15F, down from 4.9% in 1Q15 and 4.7% in 2Q15.  

Partial sale of MAKRO soon. Its stake in MAKRO is now at 97.88% and CPALL is considering selling some shares to raise free float from 2.12% to at the very least meet the SET’s free float criteria at 15-20%. It will set its selling price above its acquisition costs. There is as yet no timeline or final amount to be sold; this is waiting for SEC approval and market timing. We estimate the sale of 10% of its holding in MAKRO would raise CPALL’s earnings by 2% (lower funding cost from debt repayment outpacing the lower contribution from MAKRO). 

BUY with mid-2016 DCF PT of Bt58. Its 1H15 was outstanding and we expect this to continue through 2H15 with the sector’s best core earnings growth, underwritten by better operations at its convenience and cash & carry stores plus lower funding costs. We have not yet included the earnings upside if it sells some of its stake in MAKRO. Key risks include changes in SSS growth and margin, store expansion and competition.