July 18, 2012

Thai CPF reports weak performance

Thailand's Charoen Pokphand Foods PLC (CPF) has earlier confirmed that its full year profit was cut 26% to THB17 billion (US$0.54 billion).

Management held a preview meeting at which they confirmed poorer operations on-year in 2Q12 (we estimate profit of THB3.6 billion (US$0.11 billion), down 25% on-year) despite consolidation of its recent purchase of 74% in CPP, due to significantly lower meat prices locally (peaked last year in 2Q11 vs. bottomed out in 2Q12) and abroad (Malaysia, Taiwan, Vietnam and India).

The bottom line, however, will be shored up by the sale of some of its holding in CPALL.

Prices: Down for local meat but up for raw materials. Current local swine price is THB57/kg (US$1.8), down 14% from peak in May, and broiler price is THB36/kg (US$1.14), down 10% from June.

These prices are equivalent to industry breakeven cost and profit of only THB1-2/kg (US$0.03-$0.06) for CPF (benefits from scale), far lower than the THB5-8/kg (US$0.16-$0.25) needed for a decent gross margin. Management is more optimistic regarding a rebound in local meat prices than we are: they believe prices for both products will be stronger in 2H12 than 1H12 as domestic demand improves and influx of new supply stops. Soybean meal prices have risen 25% YTD but management said it had locked prices last year for supplies sufficient to last through year's end. However, this will have an effect on next year's earnings - since we had assumed an increase of only 7% p.a. in raw material prices, if price remains at current levels, spread in 2013 could be lower.

CPF announces acquisition of Chester's Grill. CPF is buying 100% of Chester's Food from CP Group for ~THB450 million (US$14.22 million) (2012 CAPEX budget is THB15 billion) (US$0.47 billion) with an eye to expanding its retail distribution channels. Chester's has 160 branches and plans to add ten stores annually. The deal is priced at 13x PER, lower than the 15x food peers currently trade at. Chester's Grill brought in revenue of THB842 million (US$26.6 million) in 2011 with profit of THB35 million (US$1.11 million), minute against CPF's 2011 core profit of THB14.3 billion (US$0.45 billion). CPF has more M&A deals in the pipeline that could act as catalyst for stock price.