Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)  

 

Investment thesis       

With the increasing risk factors of a global economic slowdown, the FX volatility and weakening Turkish and Chinese macroeconomics, we have taken a more conservative stance on CPF’s FY16-17 core earnings profile. We have cut our core earnings projections 12% for FY16 (to Bt7.06bn) and 18% for FY17 (to Bt8.27bn) and our DDM-based target price by 7% (to Bt28). Its FY16 core operations are mainly driven by the turnaround of its Thai shrimp unit and modestly improved domestic livestock margin (led by chicken and pork price gains and lower raw material prices). Offshore, Russia will lead the FY16 growth, on the back of the sustained strong pork price and the full-year consolidation of S&W. Our BUY rating stands, premised on its cheap valuation—FY16 PER of 12.7x against its long-term mean of 14.1x.

Results recap for 4Q15—core profit undershot our estimate  

CPF posted a Bt1.55bn net profit for 4Q15, up 92% YoY but down 57% QoQ. Excluding extra items in 4Q15—a Bt4m FX gain, a Bt904m net-of-tax gain from trading CPALL shares, a Bt49m net-of-tax gain from a land sale and CPP’s Bt321m gain on relocation of factories—core profit was Bt270m, a reversal from a Bt345m core loss and down 84% QoQ. Net and core profits undershot models by 19% and 74%, respectively, thanks to lower GM, higher SG&A and tax expenses than assumed. The rise of GM to 14.2% in 4Q15 (against our 15% estimate) was led by the Thai shrimp recovery—OPM went from -14.5% in 4Q14 to -1.1% in 4Q15. The Thai shrimp unit posted an Bt87m 4Q15 operating loss, shallower by 93% YoY (against a Bt46m 3Q15 operating profit) thanks to greater industry-wide shrimp output from farmers and OPEX control. 

Lower FX loss led to shallower Turkish net loss in 4Q15, but weaker consumption, exports and acts of terrorism still dragged on Turkish core operations. India surprisingly posted a significant net loss due to a chicken price slump. The improved shrimp drove a Malaysian unit into black ink while the increased pork price and a one-month consolidation of S&W boosted Russian 4Q15 net profit. CPP’s net profit rose 14% YoY, despite its weaker sales on the Chinese economic slowdown.        

Thai shrimp unit turnaround—core earnings catalyst in 2016 

We believe that the key 2016 focuses will be the sustained low soybean meal price, the Thai shrimp unit turnaround and the pork supply deficit and its linked sustained high pork price. The Turkish farm production has been reduced while the feed has been increased (with the targeted lower OPEX); hence, we expect the obvious Turkish improvement in 2H16. We remain confident about the Thai shrimp unit break-even in 2016, led by greater shrimp farming (more shrimp feed and baby shrimp sales) and higher shrimp sales price. Regarding the global chicken breeder shortage from the US bird flu, management expects the global supply shortage impact during YE16 through to 1H17, which might boost the Thai chicken exports volume to Japan.