CP All
Just getting better and better
CPALL shares fell with the market early this month, and now is a good chance to accumulate. It has had outstanding SSS growth in 3Q16TD, confirming our view of stronger earnings in 2H16F. We also like CPALL for its 2-year earnings growth of 22% p.a., beating its sector’s 18%. We have revised earnings up to incorporate lower interest and effective tax rate, which gives a new mid-2017 DCF PT of Bt72 (from Bt65). BUY.
Solid SSS growth in 3Q16TD. In 3Q16TD, SSS growth has been solid, close to 1H16’s 4% YoY. Behind this is better sentiment and several long weekends in July-August plus higher cigarette prices after a hike in excise tax in Feb 2016 (cigarettes contribute close to 10% of sales) and a good response to its stamp campaign (Jul 26 – Nov 25). This year’s premiums, using Sanrio characters and Line Friends, have been a hit; the products arouse greater interest and in addition, more suppliers have participated this year. It maintains its target 2016 SSS growth of at least 3%.
Continued expansion. CPALL maintains its 2016 store expansion target of 700 stores (vs. 420 stores in 1H16), raising total stores to above 9,500 by end-2016, putting it on track to reach 10,000 stores in 2017 and 12,000 stores in three years.
More gross margin improvement. In 1H16, convenience store gross margin grew 60bps YoY: 1) +40bps from a better product mix and 2) +20bps from a drop in logistics costs thanks to lower oil price and a new distribution center (in 3Q15). Margin is expected to continue to improve in 2H16, mainly from a better product mix (normally +20-30bps p.a.) and partly from lower logistics costs.
Better cash & carry operations (98% in MAKRO) in 2H16F. With better sentiment and less intense market competition, in 3Q16TD, MAKRO has achieved SSS growth in the mid-single digits (vs. -0.6% in 3Q15 and +6% in 2Q16). Its gross margin will be better in 2H16 on the absence of the change of accounting treatment done in 1Q15 and lower price competition than in 2Q16.
New low-cost debentures. In August, CPALL issued Bt12bn in new debentures (effective interest rate of 3.2% p.a.) to refinance its existing debentures (effective interest rate of 4.1% p.a.) which will be retired in October. This will cut interest expenses by Bt100mn/year. The new debentures issued during this low interest rate environment to refinance a portion of the retired debentures (Bt26bn in 2017, with effective interest rate of 3.6% p.a.) will add to next year’s interest cost savings. Based on our estimate of operational improvement alone, net D/E (adjusted by subtracting deferred tax assets and liability) will be 2.7x in 2016F and 2.1x in 2017F, well below its bond covenant ceilings of 3.5x in 2016 and 2.5x in 2017.
Earnings raised. We raised our forecast by 3% in 2016-17F to reflect lower interest expenses from the new debentures and a lower effective tax rate brought by the government investment incentive program that gives tax breaks on investment in 2016 (tax savings of ~Bt400mn/year).
