Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF) 

 
We expect CPF to report 2Q16F net profit of Bt4.5bn, +50% YoY and +19% QoQ. Excluding extra gains shows core profit of Bt2.8bn, +535% YoY and +23% QoQ, backed by wider margin on Thai livestock and aquatic units, better overseas livestock units, and more equity income from CPALL. Any price correction from the concern about a one-time tax expense in 2Q16F is, in our view, opportunity to accumulate, backed by further strengthening in 2Q16-3Q16F. BUY with mid-2017 SOTP PT of Bt38. 

 

Expect 2Q16F net profit of Bt4.5bn, +50% YoY and +19% QoQ, its highest since 1Q12. We expect extra gains from securities trading and the change in fair value of biological assets of Bt1.7bn in 2Q16F; excluding these gives a normalized 2Q16F profit of Bt2.8bn, +535% YoY and +23% QoQ, its highest since 3Q11. Backing this is: 1) wider margin on livestock and aquatic units in Thailand in tandem with higher prices, lower feed costs, and better volume; 2) better contribution from overseas livestock units, mainly on better farm and feed operations in regional markets and China; 3) higher equity contribution from CPALL (+22% YoY), due to higher convenience store profit and lower funding costs. We estimate 1H16 DPS at Bt0.3. It will release results on Aug 11. 

 

Better operations. Livestock. In 2Q16, swine and broiler spreads (prices minus feed costs with a 3-month lag) widened 33% YoY and 7% YoY, backed by better product prices (+11% YoY for swine and flat YoY for broiler prices) from supply adjustment and lower feed costs (-8% YoY for corn and flat YoY for soybean meal costs). A shortage of swine in China pushed swine prices up in China and the region. This is positive for CPF’s operations in Thailand, as well as farm operations in Vietnam, Cambodia, and Laos and its feed operations in China. As it will take time to adjust supply, CPF expects swine price to stay high for the rest of 2016, and this will help lead broiler prices up. On the feed cost side, to alleviate any adverse impact from higher costs, CPF has lengthened its raw material inventory to 4-6 months in advance, waiting for abundant supply from next crop season in late 2016. CPF estimates any increase in actual feed costs will be seen in late 2016 to 2017 at the earliest. Aquatic. Local shrimp sales volume is moving up to reach 300K tons in 2016F (+15% YoY), backed by more successful shrimp farming after the EMS crisis. This, together with a rise in shrimp price in 2Q16 (+6% YoY) is encouraging shrimp farmers to bump up their volume. CPF expects its Thai aquatic unit to return to a positive EBIT margin in 2016F and net profit margin in 2017F, the best since EMS hit in 2012. Brexit. The impact will be limited, as CPF exports only 2.5% of its sales to the EU with 100% currency hedging for every contract. 

 

Potential one-time expenses on tax issue. Based on a report in Krungthep Thurakij, the Supreme Court has ruled that 40 companies in Thailand (including CPF) will have to pay back taxes extending back until 2010 worth a total of Bt2-3bn. the Supreme Court has ruled that their tax liability, as calculated based on the BOI method, was lower than the calculated via the Revenue Department’s method. The payment must be made before August 1 to avoid penalty. CPF said it is likely to book this item in 2Q16, but the amount is not yet finalized; we roughly estimate this could range from a few hundred million to a billion baht. CPF is also considering whether it will record this on the P&L or as equity on the B/S; we thus have not yet put it in our 2Q16F earnings.