Company
Update:
Charoen Pokphand Indonesia (CPIN IJ, Sell, TP: IDR2,500)
Downgrading On Rich Valuations And Margin Erosion
Charoen Pokphand Indonesia (CPIN IJ, Sell, TP: IDR2,500)
Downgrading On Rich Valuations And Margin Erosion
We downgrade Charoen
Popkhand to SELL (from Buy) with a lower DCF-derived TP of IDR2,500 (from
IDR3,700, 22% downside), and have cut our 2017F-2018F net profit estimates by
20-30%. On top of its rich valuations, we believe Charoen Popkhand’s earnings
are likely to disappoint in the coming quarters due to margin pressure at its
key business segments. Meanwhile, the acquisition of 7-Eleven Indonesia may
further burden its weak earnings outlook, in our view.
¨
Given
high earnings sensitivity, gross profit margins are set to decline. After speaking with
companies under our coverage, the key takeaway from the poultry sector’s 1Q17
results is the QoQ decline in feed and day-old chick (DOC) margins due to
higher feed material prices (after imported corn was banned) and DOC price
capping. Pricing power is also weak at this juncture due to soft demand from
farmers, hence margin improvement in the near term is unlikely.
Charoen Pokphand Indonesia’s (Charoen
Popkhand) margins held up well in 1Q17, when compared to its smaller peers.
However, we believe potential erosion in its feed and DOC margins is inevitable
given the abovementioned factors that are affecting the entire sector. Recall
that poultry companies’ earnings are highly sensitive to the change in product
gross margins as opposed to volume growth. Based on our calculations, every 1%
decline in feed/DOC gross margins would reduce net profit by IDR300bn/100bn
respectively, or about 9%/3% of current consensus estimates.
¨
Acquisition
of 7-Eleven Indonesia may be a bitter pill to swallow. On 19 Apr, Charoen
Popkhand signed an agreement with Modern International (MDRN IJ, NR) to acquire
the 7-Eleven retail chain in Indonesia for IDR1trn. The deal is subject to
approval from the master franchiser of 7-Eleven with a 30 Jun deadline. As per
latest available data for 2016, Modern International recorded a 9-month net
loss of IDR162bn vs net profit of IDR12bn in 2015, after the Indonesian
Government banned the selling of alcohol in small stores since mid-2015 – the
key profit driver for 7-Eleven stores. Granted that Charoen Popkhand has a good
track record with managing 7-Eleven stores in Thailand, the latest acquisition
may be a drag on its cash flows for the next 1-3 years.
¨
Downgrade
to SELL, consensus estimates on the high side. Based on our revised
estimates (assuming lower feed and DOC margins), Charoen Popkhand is trading at
2017F P/E of 20x, and appears expensive given its weakening earnings outlook.
We also believe that consensus estimates are too high at this point. Our new
DCF-derived TP of IDR2,500 implies 2017F P/E of 16x, which is close to the
current market P/E for the JCI.
¨ Risks. Main upside risks include an implementation shortfall in the price capping regulation for DOC and broiler chickens, and stronger-than-expected chicken demand (pricing power). Downside risks include IDR depreciation and worse-than-expected margin erosion.
Kindly click the following link for the full report: Charoen Pokphand Indonesia : Downgrading On Rich Valuations And Margin Erosion
Best regards,
¨ Risks. Main upside risks include an implementation shortfall in the price capping regulation for DOC and broiler chickens, and stronger-than-expected chicken demand (pricing power). Downside risks include IDR depreciation and worse-than-expected margin erosion.
Kindly click the following link for the full report: Charoen Pokphand Indonesia : Downgrading On Rich Valuations And Margin Erosion
Best regards,
Norman
Choong, CFA
Assistant
Vice President
Research
Analyst – Utilities, Oil & Gas, Telecommunications, Poultry
PT.
RHB Securities Indonesia
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