Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF) 

 

1Q16 net profit was Bt3.8bn (Bt0.51/sh), +27% YoY and +143% QoQ, 58% above our estimates and 84% above consensus, mainly due to higher-than-expected gross margin at 15.7% (+310bps YoY). Excluding extra gains of Bt1.5bn (FX gain, gain on change of fair value of biological assets, and gain on sale of investments), gives 1Q16 core earnings of Bt2.3bn, +222% YoY and turning around from a core loss of Bt133mn in 4Q15. The rise YoY was backed by stronger aquatic and livestock units in Thailand and livestock units overseas, and the jump QoQ was seasonal.  

 

1Q16 highlights. Of gross profit, 33% came from the Thai livestock unit, 5% from the Thai aquatic unit, 59% from the overseas livestock unit, and 3% from the overseas aquatic unit. Overall gross margin was 15.7% (+310bps YoY). Gross margin from Thai livestock was 15.6% (+480bps YoY) from higher swine and broiler prices amid lower feed costs. Gross margin from Thai aquatic was 11.9% (up from -3.2% in 1Q15), from more local shrimp volume production, at which level EBIT margin was 2.3%, the best ever since EMS in late 2012. Gross margin from overseas livestock was 17% (+130bps YoY), mainly on a widening in margin at CPP HK to 19% (+190bps YoY) from better farm margin in Vietnam and feed margin in China. Gross margin of overseas aquatic fell 470 bps YoY to 7.9% from one-time expenses for business adjustment in Vietnam.  

 

Company guidance.  

 

 CPF guided to a better 2Q16-3Q16F from seasonality, low feed costs, better meat prices, gradual revival in shrimp units, and improving overseas operations.  

 

 CPF expects abundant supply to keep feed costs low. In April, corn and soybean meal prices were Bt8.4/kg (-14% YoY) and Bt16.5/kg (-10% YoY), respectively.  

 

 CPF feels meat prices will stay high. A supply shortage of swine in China (the world’s largest swine consumer) from environmental issues, disease outbreak and drought pushed swine prices that country up to Bt100-120/kg. Border trade with China led swine prices up to Bt84/kg in regional markets and Bt78/kg in Thailand (+18% YoY) in April. The higher swine prices do not just benefit CPF’s operations in Thailand but also help boost farm operations in Vietnam, Cambodia, and Laos and its feed operations in China. As it will take time for supply to adjust back to normal in China, CPF expects swine price to stay high for the rest of 2016. As for chicken, domestic broiler prices picked up to Bt36.5/kg (+1% YoY) in April on better demand in both Europe and Japan.  

 

 CPF expects local shrimp production to rise to around 300K tons in 2016F (+15-20% YoY), from the successful development of genetics and feed formula to prevent EMS.  

 

 After downsizing its broiler farms in Turkey and aquatic unit in Vietnam in 1Q16, CPF expects loss contribution (if any) to be lower for the rest of 2016. 

 

Raised earnings; still sector’s top BUY. We raised core profit by 20% in 2016-17F, to reflect the increase in gross margin, raising our assumption by 50bps to 15.1% in 2016F and 15.5% in 2017F. We maintain BUY with a new mid-2017 SOTP TP of Bt38 (from Bt30 at end-2016), a combination of the revision and rolling over TP. We like CPF, which is looking at even more earnings improvement in 2Q16-3Q16F from seasonality and higher contribution from all units.