December 13, 2007

 

Analysts optimistic on CP Foods in 2008 despite drop in profits this year

 

 

Stock analysts are optimistic about CPF's performance in 2008 even though its earning forecast has been revised downwards in 2007 to reflect losses in the first half of the year.

 

Although share prices slipped 7 percent since last month and a 39-percent drop in normalised profit this year to 1,236 million baht (US$40.72 million) was expected, 2008 earnings are projected to pick up 171 percent to 3,344 million baht (US$110 million).

 

Growth factors include better meat prices, rising domestic consumption coupled with healthy growth of exports and oversea units.

 

The company's performance picked up in 3Q07 from losses in the first half and is showing continuing growth based on favourable meat prices, analysts said.

 

The optimism is also tempered by a gradual increase of domestic consumption following an improved economy and consumer confidence.

 

Even with lower chicken demand, chicken prices have remained favourable at Bt38/kg, well above the average cost of Bt30/kg.

 

The pork business has also turned profitable, improving from a loss in the first half, when prices were at Bt36/kg.

 

Pork prices currently stand at Bt43-45kg compared with the average cost of Bt42/kg.

 

Meanwhile, rising raw material costs (corn and soybean) are likely to be passed on by adjusting selling prices.

 

Analysts also expect minimal impact from the appreciation of the baht on CPF's export sales, which account for nearly a fifth of sales.

 

One reason is that commodity prices are adjusting to reflect the weakening US dollar.

 

Secondly, CPF partially benefits from lower imported raw material prices ( which accounts for 20 percent of total production cost) through bulk buying.

 

Thirdly, roughly 30 percent of CPF's export transactions are priced in euros.

 

Shrimp and cooked chicken exports would also benefit from the JTEPA, a free trade agreement between Japan and Thailand, which took effect in November 2007.

 

Import tariffs for cooked chicken to Japan were to be reduced from 6 percent to 3 percent in five years while the 5-percent shrimp tariffs would be removed immediately.

 

The outlook for CPF's sprawling feed empire in Turkey, India, Malaysia, and China continues to be favourable.

 

The share of sales from its overseas businesses is expected to rise from 12 percent in 2006 to 17 percent this year.

 

A favourable ruling from the WTO against the US imposed shrimp tariffs would further benefit the company's shrimp exports.

 

Although the US is appealing the decision, meaning it would take another half-year at least before changes would be seen, it is unlikely the decision would be reversed.

 

CPF has 4 percent of sales coming from shrimp exports to the US.