April 27, 2004

 

 

Thailand's CP Foods Recovers From Bird Flu Outbreak
 

Thailand's major producer and exporter of chickens Charoen Pokphand Foods is showing signs of recovery from a bird flu outbreak. The virus ravaged chicken farms across the country earlier this year, prompting analysts to start reviewing their sell recommendations.

 

Some analysts said it was too early to issue "buy" calls for the stock as it could take a year or more for Thailand to be completely free of the disease. However many of them now suggest accumulating the stock given the improving outlook.

 

Phatra Securities already has a "buy" call for long-term investment on CPF, noting that the adverse impact of bird flu has been already factored in the share price. On the other hand, Seamico Securities upgraded its recommendation to "accumulate" from "hold" earlier.

 

"It may look a bit dim for the stock in the first half of the year due to the lingering effect of bird flu, but the second half will be a lot better. When the bird flu is completely out of the way, CPF will probably benefit the most from the recovering chicken industry," said Terapatr Mathanukraw, an analyst at Seamico Securities.

 

CPF's price tumbled 28% to Thai Baht 3.20 ($1=THB39.600) during the peak of the bird flu outbreak in late January, and started to recover gradually. The current price at THB3.78 at Monday's close is still below Phatra's target price of THB5.60 and Seamico's THB4.34 per share. Since the beginning of the year, CPF has lost 17% compared with a 14% fall in the main index.

 

CPF used to be a top-rated stock in the buying list of most major brokerages due to its status as the flagship company of the country's agricultural conglomerate Charoen Pokphand Group. However, most analysts changed their recommendations to sell late January, when the company suffered a big blow from the avian influenza epidemic which prompted the destruction of millions of birds.

 

CPF's core business was greatly affected by the ban on Thai chicken imports by Japan and the European Union, (Thailand's main poultry export markets) and reduced local chicken consumption amid fears the deadly H5N1 virus would spread to humans. Thailand is the world's fourth largest chicken exporter and CPF is the country's second largest chicken producer.

 

Eight people have died from the virus in Thailand and more than 37 million chickens have been culled in a bid to stop the outbreak.

 

After the government took measures to contain the disease, Japan lifted the ban on cooked chicken imports from Thailand late February thereby gradually improving consumer confidence.

 

Authorities have said the disease is now under control, but new outbreaks continue to emerge. The livestock department said on Monday that a new bird flu outbreak was detected at the Uttaradit province in northern Thailand.

 

Therefore, some analysts said it might be wiser for investors to hold off until the expected poor first quarter results come out around the middle of next month as this may prompt another slide in the stock price.

 

"We are reviewing our forecast and may upgrade to neutral from the current reduce recommendation. We believe the second half will be a lot better as demand and price for chicken are picking up. But the stock price may fall further when the unsatisfactory first quarter result comes out," said Prasit Sujjiravorakul at Capital Nomura Securities.

 

CPF is likely to record a huge loss in the first quarter as a result of falling sales to its core chicken products both locally and abroad.

 

However, analysts said the losses in the first quarter this year may be narrower. This is compared with THB862 million in losses recorded in the same period last year when CPF suffered from falling chicken prices.

 

Capital Nomura's Prasit expects CPF's first-quarter losses this year to be around THB700 million-THB800 million. It said the company's pork sales and divestment of a loss-ridden unit, Charoen Pokphand (USA) Inc., during the period will help curb the losses.

 

Dhanin Chearavanont, the chairman of Charoen Pokphand Group, has said the performance of CP Foods this year would not be worse than last year, when SARS had more of an impact on the overall economy than bird flu has had this year.

 

The company expects consolidated sales revenue for 2004 to grow by 5% from THB83.1 billion last year. Chicken products account for 30% of total sales, pork 12% and shrimp 9%, while the rest comes from animal feed and other food products, Tisco Securities said.

 

Capital Nomura has revised down its forecast on CPF's 2004 net profit by 31% to THB2.31 billion. But it is still higher compared with THB2.24 billion last year.

 

The company has invested THB8.5 billion on an integrated chicken-manufacturing complex in northeastern Thailand. This is to ensure high quality "farm-to-table production" and the meeting of food safety requirements of importing countries. The plant will open around the middle of this year, and the company hopes it will help compensate for the shortfall in the first half.

 

Another concern for CPF is possible U.S. anti-dumping measures related to shrimp imports from a number of countries, including Thailand. The U.S. is expected to make a verdict on the case in the second half of the year.

 

However, many analysts believe that the potential anti-dumping duties on Thailand may not be as high as anticipated earlier.

 

Looking forward, CPF's earnings should rise in line with growing food consumption. Phatra Securities projected that the company's net profit will rise to THB4.81 billion in 2005 and THB6.02 billion in 2006.