November 27, 2009
No bird flu prompts CPF to revise Q4 earnings upward
Stronger-than-expected Q309 earnings and no news of a bird flu outbreak in Q409 prompt Thai conglomerate Charoen Pokphand Foods to revise 2009-10 earnings upward.
The 2009 earnings were adjusted up by 11.3 percent on fatter margins and on extra gain from negative goodwill arising from business combination of THB447 million (US$13.44 million). For 2010, earnings were revised upward by 6.4 percent on higher margins. Gross margin revision to 16.3 percent is conservative as gross margin already hit 18.3 percent, implying upside potential to forecast.
Given the volatility in the farming business, CPF aims to reduce the proportion of low-margin farm sales to 33.3 percent, from 47.0 percent within the next five years. The missing portion will be replaced by high-margin food business. To grow the food business to 33.3 percent in 2014, CPF will expand its ready-to-eat products under CP Brand to all continents. For the local market, after the success of Kai Yang Ha Doa (chain store for roasted chicken), CPF plans to launch a chain store of Hainanese Chicken Rice and Noodle with Roasted Duck.
Total sales growth in 2009 would be flat at 3.7 percent and increase to 8.3 percent in 2010. According to the company''s strategy, CPF wishes to focus on margins rather than volume or put emphasis on food rather than on farm (farm offers high volume, but low margins while food offers low volume, but high margins). Domestic revenue growth is expected to be flat at 0.6 percent in 2009 and improve to 5.6 percent and remain at that level until 2013. Overseas business should be a key revenue driver in the future and is expected to 20.0 percent in 2009 and 2010. With the higher base, after 2010, its overseas business growth will dwindle to approximately 13.0 percent per year.
Looking ahead to 2010 and 2011,
pork and broiler production are expected to expand gradually as farmers remain cautious about the economic outlook and banks remain conservative in lending. Given the limited supply in 2010, the
International Monetary Fund (IMF) forecasts pork prices to increase 4.5 percent; shrimp prices to increase 6.7 percent, and chicken prices to remain flat, suggesting favourable meat price both in the local market and export market in 2010.
Even though raw material prices are expected to be higher in 2010, limited impact is anticipated to CPF as it already locked in its raw material at low costs. The company estimates that these low-price materials will adequately support its production until at least Q1 in 2010.
Seasonally, the raw material prices will dwindle by the end of Q2 due to the harvest season. CPF is expected to experience higher raw material costs for just a couple of months in 2010, implying an insignificant impact to overall margins.
The outlook has improved for the Thai shrimp industry following an agreement to settle US anti-dumping (AD) orders against Thai shrimp imports. In 2009, the anti-dumping duty on imported Thai shrimp to the US market was 4.7 percent compared to its competitors at 1.0 percent. The termination of the anti-dumping duties on Thai shrimp should be positive to shrimp exports as the US is a big market. If shrimp farmers cannot increase their production fast enough to catch up with the higher demand, the local supply should be smaller, pushing local prices upward. 2010 is expected to be a good year for shrimp.
Another upside potential should be from fund raising in Vietnam and Turkey which could help CPF rapidly expand its overseas business. CP Vietnam Livestock is planning to dual list in the Vietnamese stock exchange and Hong Kong stock exchange or Singapore stock exchange to ensure rapid business expansion. To grow by 20.0 percent per year, CP Vietnam Livestock requires an investment of THB1 billion to THB2 billion per year to expand its production in feed mill, chicken facilities and integrated shrimp farm. The company is also planning to list its subsidiaries in Turkey, CP Standart Gida Sanayi Ve Ticaret, on the Istanbul Stock Exchange in the near future to reduce resistance against foreign companies and to support its long-term investment plans. CP Standart Gida has 10.0 percent of the market in Turkey by value. Its sales are projected to achieve THB15 billion this year, accounting for 10.0 percent of CPF''s overall sales.
US$1 = THB33.23 (Nov 27)