Equity Analysis /

Charoen Pokphand Foods: Pork shortage powers earnings; reiterate Buy

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    6 May 2019
    Published by
    • We raise our target price for CPF TB to THB38 from THB34 on rising pork prices in Thailand, Vietnam and China.
    • The outbreak of African Swine Flu (ASF) in the region has led to a culling of pigs, leading to a shortage of pork.
    • Pork and chicken prices are rising in the core Thai market.
    • At an adjusted 5.2x EV/EBITDA, CPF trades at less than half the sector average.

    We raise our earnings forecast for FY 19 and FY 20 by 3% due to a higher Average Selling Price (ASPs) for pork and chicken in the core Thai market. Our earnings forecasts are 31% and 39% above consensus, as we are bullish on Thai consumer spending in the election year. Q2 results are expected on 13 May.

    ASF is spreading and leading to a mass culling of pigs. Since Q3 18, over 130 outbreaks of AFS have been recorded in China, and over 120,000 pigs have been culled (out of c430mn in China). Our estimates suggest more could be culled eventually. Pork output is likely to fall by 20-30% in 2019. Pork prices are already up 30% YoY.

    ASF has led to an upsurge in chicken prices. Chicken prices have risen by 53% yoy in China, as consumers have sought alternative forms of protein. This suggests that CPF’s China business (25% of FY 17 revenue) would face a limited impact overall from ASF. CPF produces both chicken feed and swine feed – good news for the performance of CPP (43 HK), CPF’s associate investment with operations in China and Vietnam.

    Pork and chicken prices are rising in any case in Thailand, after several years of oversupply. Thai meat supplies are moving decisively to shortage, from plenty. The past two years of oversupply has seen underinvestment by producers. This year, we are seeing a recovery fueled by higher consumer spending (driven by election stimulus).

    At 5.2x FY 19f EV/EBITDA ex-CP All, CPF TB is at half the industry average. CPF TB is a dominant and intensely branded consumer stock. Implied EV/EBITDA valuations suggest it is trading at a 31% discount to the sector average. On the valuation front, if we strip out the 33% associate stake in the seven-11 business CP All (CPALL TB), CPF is trading at just 5.2x FY 19f EV/EBITDA, which is less than half the sector average. We reiterate Buy.