Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF) 

 

Investment thesis

Although the firm is broadly cautious on the global economic slowdown and FX volatility and expects a further China slowdown, we think that its FY16 core operations will jump strongly led by improved shrimp and domestic livestock margins and the low 1H15 core profit comparison. Our BUY rating stands, based on a FY16 core profit jump and a cheap valuation—FY16 PER of 11.9x against its long-term PER of 14x. 

Insights into 4Q15—a YoY reversal into core profit   

We estimate a Bt1.9bn net profit for 4Q15, up 135% YoY but down 47% QoQ. Stripping out the trading gain on CPALL shares (net of tax) and FX, we estimate a Bt1bn 4Q15 core profit, a reversal from the Bt348m 4Q14 core loss but down 41% QoQ. The new 4Q15 core profit estimate is more bullish than our previous Bt530m, led by a greater livestock margin than was assumed. The YoY core profit rise is led by significant loss reduction in its Thai shrimp unit and improved Russian and Vietnamese units (despite deeper Turkish net loss). The QoQ drop is due to the low season. We expect a QoQ higher domestic livestock margin on the lower corn price (down 15% QoQ), despite 5% QoQ drops in both chicken and pork prices. The SBM price was flattish QoQ. 

We estimate a GM of 15% in 4Q15, against 12% in 4Q14 and 15.2% in 3Q15. We assume that its Turkish unit will post a Bt500m net loss in 4Q15, 25% YoY deeper (but 12% QoQ shallower) amid acts of terrorism, and the conflict with Russia, which led to lower domestic consumption and exports. Feed business in China looks weaker in 4Q15 due to its economic slowdown. However, Vietnam and Russia (excluding S&W) will be solid QoQ, led by stronger pork prices. We expect a Bt100m Thai shrimp operating loss, 89% YoY shallower (and a reversal from a Bt46m 3Q15 operating profit), due to its internal cost reduction programs and greater demands from overseas clients. 

Global economy and FX volatility—key challenges in 2016

CPF expects a 5-10% YoY rise in FY16 sales with a restrained outlook on domestic consumption recovery and a cautious view on global economies and foreign exchange. China’s economy will be a key challenge while the Turkish unit will remain a problem in 2016 given the prolonged terrorism, and political and economic issues. The aim to reduce the farm portion in Turkey will take at least six months to bear fruit. Even so, we expect the Turkish loss to be 50% shallower in FY16. 

It aims to broadly cut SG&A expenses by 20% for every business unit except existing projects that have already been invested in. With regard to FX, most foreign currencies (i.e. RUB, CNY and TRY) have weakened by 3-8% against the THB since early 2016. Despite concerns over the global economy (including Turkey and China) and FX, we expect its 1H16 core profit to post a stronger YoY rise, led by improved livestock and shrimp margins bolstered by more balanced supply and demand mechanisms and the low 1H15 core profit base.