Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF) 

 

Investment thesis

We believe that CPF’s earnings will gradually recover QoQ in 2H15 before a strong FY16 bounce led by the low FY15 earnings base, its Thai shrimp unit, lower livestock supplies, improved overseas units except Turkey and the full-year consolidation of its Russian chicken operation. Its core earnings have already bottomed out in 4Q14-1H15. Our BUY rating stands, premised on a FY16 core earnings jump.  

Insights into 3Q15—a YoY core profit drop   

We estimate a Bt2bn net profit for 3Q15, down 52% YoY and 33% QoQ. Stripping out the trading gain on CPALL shares (net of tax) and FX, we assume a Bt1.1bn 3Q15 core profit, down 62% YoY but up 313% QoQ. The new assumed 3Q15 core profit is more bullish than our previous Bt800m, led by a greater pork margin than was assumed. The YoY core profit plunge is led by weaker domestic livestock prices, lower export volume (weaker currencies of importing countries), lower domestic sales (sustained weak consumption), deeper Turkish loss and higher marketing expense to push domestic sales. Despite a YoY drop, we witness a QoQ recovery led by high season, greater export volume, improved pork margin and shallower loss of Thai shrimp unit. 

We estimate a GM of 14% in 3Q15, against 14.5% in 3Q14 and 13.4% in 2Q15. We estimate that its Turkish unit will post a Bt300m net loss in 3Q15, close to 2Q15 and 400% YoY deeper in the red, led by weak domestic consumption and lower export volume from the conflict in the Middle East. All overseas units except Turkey will improve YoY and QoQ. We expect a Bt600m Thai shrimp operating loss in 3Q15, 21% QoQ shallower, mainly due to the unit’s cost reduction moves and the temporary plant shutdown rather than a significant shrimp output rise.

FY16 earnings bounce on overseas and Thai shrimp units  

The weaker THB against USD in 3Q15 contributed modestly to the top line, given that exports account for only 6% and that other currencies have depreciated more against the USD than the THB. The deeply weak BRL against the USD has made chicken exports from Brazil even cheaper, which has led to export price renegotiation for new clients seeking raw product. We expect all overseas units except Turkey to improve in FY16, led by India, Russia, Vietnam, Malaysia and Philippines. Turkey and China remain the key factors to watch in FY16. We expect the Thai shrimp unit to turn around at the operating level in 2H16, due to the cost reduction programs and a rise in shrimp supply.

FY15 sales target of 4-5% difficult to achieve 

Given a 2% YoY drop for 9M15 sales, the firm’s FY15 sales target of 4-5% looks unachievable. We assume the flat FY15 sales growth. The consolidation of Russia’s chicken operation starting from 4Q15 will help bolster sales in 4Q15 and FY16 (in which the firm targets 5-10% sales growth for FY16). We assume a 6% sales growth for FY16.