Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF) 

 

CPF underperformed the SET by 23% in 2015 in response to its poor 2015 (-63% YoY). Spreads have widened recently and shrimp volume is heading back up, leading CPF to outperform the SET by 8% YTD. We still see this as not fully recognizing the strength of its earnings revival to Bt7.4bn (+192% YoY) in 2016F, backed by better domestic livestock and aquaculture units, inorganic contribution from new business in Russia, and higher equity income from CPALL. BUY with SOTP TP of Bt30. 

 

Positive developments to support 1Q16. In 2M16, broiler and swine spreads widened by 8% and 9% from 2015, and 13% and 28% off 1Q15’s low base, thanks to better product prices after supply underwent adjustment plus lower feed costs. Local shrimp sales volume continues to improve, backed by more successful shrimp farming after the EMS crisis. This, together with higher shrimp price (+19% in 2M16 from 2015 and +8% from 1Q15) after a disease outbreak in India and Vietnam will encourage shrimp farmers to bump up their volume. We expect CPF to deliver robust 1Q16 earnings improvement YoY, mainly from better livestock and aquaculture units in Thailand as well as inorganic contribution from the purchase of a poultry business in Russia in late 2015; a QoQ improvement will be seasonal.  

 

Outstanding improvement in 2016F. Core earnings are headed to surge 192% YoY to Bt7.4bn in 2016F. There are several factors contributing to this. 1) Its livestock business has been improved by an adjustment in domestic supply and higher domestic and export volume. 2) The shrimp business is looking better with volume rising to its highest since being hit by EMS in 2012. 3) More contribution from overseas after it bought a poultry business in Russia in late 2015. 4) It will book a higher equity contribution from CPALL. Of the 192% earnings growth, 40% will come from its new business in Russia, 45% from higher CPALL equity income, and the rest from organic operational improvement.  

 

LT target. CPF targets sales growth of 10% over the next five years with a focus on using its expertise to diversify and invest abroad, particularly in countries where meat consumption is moving up strongly. It also plans to raise its value-added business via expanding ready-to-eat and processed food products. Working to increase food sales notably in Thailand, CPF targets sales portion from feed at 52% by 2020, farm at 33%, and food at 15% (vs. 52%, 36%, 12% in 2015). With less contribution from farm units, its margin should be less volatile over the longer term.  

 

BUY with end-16 SOTP PT of Bt30. We like CPF for its positive earnings momentum from 1Q16F onwards and the strongest turnaround in its sector (+192% YoY), which we do not believe the market has fully priced in. We get an end-2016 SOTP target price of Bt30/share: 1) Bt25/share from CPALL (35% stake in CPALL, using CPALL’s fair value of Bt58); 2) Bt5/share from core operations (applying 18x PE to its feed business, 16x PE to its farm business, and 20x PE to its food business).