CPF - Better than modeled

(BUY/Target Price Bt48.00)

Above estimate: CPF reported a Bt12.1bn net profit for 1Q12, up a robust 229% YoY and 449% QoQ. There were two major extra gains

Above estimate: CPF reported a Bt12.1bn net profit for 1Q12, up a robust 229% YoY and 449% QoQ. There were two major extra gains—Bt8.7bn from CP Vietnam's asset revaluation and Bt766m in after-tax gains from trading CPALL stock and the divestment of stakes in two insurance companies. Core profit was Bt2.7bn—down 9% YoY but up 108% QoQ. Net profit and core earnings beat our estimates by 71% and 119%, respectively. Extra gains were 63% higher than assumed. GM was 13.6% (our estimate was 12%). Equity earnings from CPALL were higher than modeled.

Results highlights: The YoY slippage in core earnings was attributable to losses on domestic meat operations and weaker overseas unit numbers related to seasonality and supply surpluses. The QoQ jump was led by the two-month consolidation of CPP and a Turkish turnaround to a Bt50m net profit (from a Bt180m net loss in 4Q11). India and Malaysia posted only Bt10m and Bt40m net profits, respectively, while Russia reported a Bt90m net loss (Bt86m loss in 4Q11). CPP’s GM dropped to 12.4% from 16.4% in 1Q11, due to a realized loss on a fair value adjustment for livestock. 

Outlook: Domestic meat prices bottomed out in 1Q12 and are expected to rise in 2Q12—the low prices prompted industrywide supply-cutting, while the firm will resume exporting raw chicken to the EU in July. Management also expects Japan to lift its ban on Thai raw chicken in 4Q12. Overseas operations will turn around in 2Q12 on higher meat prices. CPP will sustain strong earnings growth in 2Q12, led by better meat prices and a huge realized livestock gain for the quarter. Management targets 20% profit expansion for CPP.

CPF is considering two potential acquisitions—one in Asia, the other in the EU. Management guided for at least one deal to be closed by YE12. The most likely candidate is a branded European food company.

What’s changed? We have revised up our core profit forecasts by 4% to Bt19.2bn for FY12 and 6% to Bt22.9bn for FY13 to factor in a stronger CPP margin and higher equity earnings from CPALL. As such, our YE12 target price rises by 8% to Bt48.

Recommendation: Our BUY rating stands. The 1Q12 core profit will prove to be the low point of the year. Bottom-line expansion starts in 2Q12.