CPALL Plc

CPALL Plc

CPALL has lagged its sector for the past three months, (+12% vs. +15% for the sector and +3% for the SET). This is a chance to accumulate, as it is positioned to do very well off the return of consumption in the provinces (government stimulus and better farm income) and higher consumer spending around the sporting events in Jun-Aug. Valuation is attractive, trading at 2016PE of 27x (vs. 30x for the sector) and 1.3x 2-year PEG (below the sector’s 1.8x). BUY with mid-2017 DCF PT of Bt60. 

 

Gain on stimulus and better farm income. Contribution from its convenience stores upcountry is 55% with 75% from cash&carry, meaning it will do well off the revival of provincial consumption brought by government stimulus and better farm income in 2H16F. Since Sep 2015, the government has used stimulus measures worth a total of Bt645bn. Of this, Bt354bn (55%) was disbursed in 4Q15-1Q16, and Bt116bn (18%) will be disbursed in 2Q16-4Q16F. Based on the latest forecast by the Thai Meteorological Department, La Nina will bring agricultural production back up in 2H16.

 

Gains from global sporting events. CPALL always does well from higher spending during global sporting events – and this year brings the UEFA Euro football cup running from June 10 to July 10, followed by the Olympics from August 5-21. Consumers stock up on food and beverages, boosting SSS in convenience stores and cash& carry outlets. 

 

Stronger SSS. In 2Q16TD, CPALL’s SSS growth improved to close to the mid-single digits (vs. +2.6% in 1Q16 and 1.1% in 2Q15), backed by: 1) hot weather boosting its food and beverage sales (72% of sales); 2) better sentiment from government stimulus;  3) an increase in tobacco selling price after a hike in excise tax in Feb 2016 (tobacco contributes close to 10% of sales). CPALL targets SSS growth of at least 3% in 2016F. 

 

Continued expansion. CPALL is keeping its 2016 store expansion target at 700 stores (vs. 211 stores in 1Q16), raising total stores to above 9,500 by end-2016, putting it well on the way to reaching 10,000 stores in 2017, ahead of its targeted 2018. 

 

More gross margin improvement. In 1Q16, convenience store gross margin surged +70bps YoY, thanks to: 1) a +30bps improvement from a drop in logistics costs from lower oil price and a new distribution center; 2) a +40bps improvement from a better product mix. The margin improvement for convenience stores should be seen through the rest of 2016, with continued benefits from lower logistics costs and better product mix (normally +20-30bps p.a. on average).

 

2016 growth driver. Of its 2016F core earnings growth of 20%, 16% is set to come from its convenience store segment (better SSS growth, expansion and wider margin), 2% from cash&carry (in 2Q16-4Q16, from better SSS growth, expansion and wider margin), and 2% from lower funding costs (in 1H16, from the completion of its LT debt refinancing with low-cost debentures in mid-2015).

 

Financial status. We estimate its net D/E (adjusted by subtracting deferred tax assets and liability) will drop from 2.8x at 1Q16 to 2.7x in 2016F and 2.1x in 2017F, well below its bond covenant ceilings of net DE (adjusted) of 3.5x in 2016 and 2.5x in 2017.