CPALL

CPALL Plc 

 

CPALL’s share has outperformed the SET by 26% YTD after reporting an excellent 9M15 (+36% YoY). It will continue to report the sector’s best growth in 4Q15F and 2016F on improvement in convenience store and cash & carry (MAKRO) operations plus lower funding costs via debt refinancing. Upside is faster deleveraging by selling a portion of its stake in MAKRO. Maintain BUY with mid-2016 DCF PT of Bt58. 

 

Improved convenience store. CPALL expects SSS growth to be positive in 2015F (vs. +1% in 9M15). SSS growth was +1.6% YoY in 3Q15 (vs. -4.5% in 3Q14 and +1.1% in 2Q15), backed by a better response to this year’s stamp campaign (Jul-Nov) featuring the popular “Rilakkuma” cartoon characters. CPALL introduced two sets of premium gifts – the first set to be redeemed by end-Sep and the second by end-Nov, supporting SSS growth for 3Q15 and 4Q15. It added 491 stores in 9M15 and plans to add 600-700 stores in the entire year. Gross margin will expand further (vs. +30bps YoY in 9M15), mainly on lower logistics costs from low oil price. We estimate the convenience store segment will contribute 15% to CPALL’s 2015-16F earnings growth.  

 

Better cash and carry (98% stake in MAKRO). MAKRO’s SSS contracted 0.7% YoY in 3Q15, eroded by weak sentiment and cannibalization; SSS has yet to switch up thus far in 4Q15. Despite the unexciting SSS, sales will continue to grow, underwritten by a more aggressive store expansion to a record 15 new stores in 2015 (11 opened in 9M15), +18% YoY. Gross margin will widen further (vs. +80bps YoY in 9M15), bolstered by the growing high-margin HoReCa segment. We expect MAKRO’s earnings to contribute 7% to CPALL’s earnings growth in 2015 and 8% in 2016. 

 

Lower funding costs. 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) with the rest in the form of LT loans (floating). By our estimates, its low-rate debt refinancing will cut effective interest rate to 4.6% in 2015F and 4.4% in 2016F from about 5.5% in 2014. We estimate the lower all-in funding cost to contribute 11% to earnings growth in 2015 and 3% in 2016. 

 

Upside from sale of MAKRO stake. Its stake in MAKRO is now at 98% and CPALL is considering selling a portion to raise free float to meet the SET’s criteria. It will set its selling price above its costs. On operational improvement alone, CPALL’s net DE fell to 4.6x at end 3Q15 from 5.3x at end 3Q14, well below its debt covenants. Thus, CPALL is in no hurry to sell some of its MAKRO stake, waiting for market timing. We estimate the sale of 10% of its holding in MAKRO would raise CPALL’s earnings by 2% (lower funding costs from debt repayment offsetting the lower contribution from MAKRO). 

 

Maintain BUY with PT of Bt58. We have fine-tuned CPALL’s forecast with lower MAKRO earnings, but this is offset by lower funding costs and leaves estimates unchanged. It will continue to lead the sector with growth of 33% this year and 26% in 2016F. 9M15 was outstanding and will be again in 4Q15F (up YoY and flat QoQ from seasonality), on better operations at its convenience and cash & carry stores plus lower funding costs. Key risks: changes in SSS and margin, store expansion and competition.