CP ALL

CP ALL Plc (CPALL)

 

Investment thesis

We accompanied CPALL executives to meet investors in Hong Kong last week. Overall, most fund managers we met were impressed with CPALL’s performance in past quarters. Even amid weak domestic consumption, the firm was still able to deliver core profit growth of 36% YoY for 9M15. But, it seemed that most of them already have positions, so further buying interest will likely be limited to the short term unless CPALL delivers more positive surprises. In our view, although CPALL’s share price has rallied 16% and outperformed the sector and the SET by 13% and 23%, respectively, YTD, we think its valuation is still attractive. Its current 12M forward PER is still in line with its historical mean, while we think it deserves to trade at a premium as its forward growth profile would be stronger than that of the past thanks to the degearing effect. Our BUY rating stands.

Expansion leads growth

Most fund managers were impressed with CPALL’s SSS numbers, which have continued to grow, while most retailers experienced SSS contractions. However, they think SSS should have already set a new norm of low single-digit growth as stores in the provinces, which were major growth drivers in past years, should be affected by weaker spending power upcountry. Nevertheless, management expects CPALL should still sustain double-digit top-line growth thanks to its expansion plans. There is still room to build up 7-Eleven outlets, even in Bangkok.

High leverage is of little concern 

Some investors were concerned about CPALL’s high debt leverage given that its net D/E and net debt/EBITDA ratios were 4.6x and 5.4x, respectively, at the end of September. However, we are unconcerned about this issue. Its solid cash flow stream (expected FCF of Bt15bn and to grow with a three-year CAGR of 22%) should easily service interest expenses and loan repayments. We expect net D/E will gradually decrease to 4x at YE15, 3.3x at YE16, 2.4x at YE17 and 1.8x at YE18, which will be lower than the bond covenant of 5x at YE15, 3.5x at YE16, 2.5x at YE17 and 2x at YE18. As such, the retailer will find it is unnecessary to make a cash call. Only the dividend payout ratio will be cut, but absolute dividend should be maintained at Bt0.8/share. The leverage ratios should even go down faster if the firm divests some of its stake in MAKRO.

Waiting for right time and price to sell MAKRO shares

CPALL confirmed its plan to dilute its stake in MAKRO but it was unable to determine when the transaction will take place, depending on market sentiment and MAKRO’s share price. CPALL reaffirms that it will not sell MAKRO at a price below its acquisition price plus carrying costs, which is estimated to be Bt43.6 at YE15 and Bt45.6 at YE16 (versus the current MAKRO share price of Bt38.5). The number of MAKRO shares to be sold should be at least 618m in order to bring MAKRO’s free float to meet the SET’s requirement of 15%.