Brokers upbeat on Cpall despite china delay

Fourteen out of the 15 brokers that updated their reports on CP All this month recommended a "buy" on the stock, with a target price in the range of Bt11Bt15.20.

These brokers include Merrill Lynch, Credit Suisse, Bualuang Securities, Kim Eng Securities (Thailand) and KGI Securities. United Securities is the only broker¬age recommending "longterm buy" for the stock.

CP All is the 7Eleven convenient store operator in Thailand, with 4,402 stores across the country at the end of the first quarter. 7Eleven convenient stores contribute 67 per cent of the company's sales revenue, while the remainder is generated by its 29.7 per centowned Shanghai Lotus Supermarket.

CP All recorded sales revenues of Bt115.36 billion last year and Bt32.86 billion in the first three months of 2008.

Its net profit amounted to Bt1.46 billion last year and Bt1.08 billion in the first quarter of this year.

The company also plans to expand to Vietnam and China, pending a licence from 7Eleven Inc of the US.

It has set a target for 5,000 stores for next year and 7,000 for 2014.

Kim Eng Securities (Thailand) has upgraded its recommendation from "buy on weakness" to "accumulate", with a fair value of Bt12.20.

It has revised down this year's earnings forecast by 29 per cent to Bt1.98 billion to reflect the delay in the full divestment of the Lotus retail business in China.

Assuming the deconsolidation of Lotus is completed in December, the broker expects normalised profit this year to reach Bt1.52 billion, up 15 per cent from last year.

The driver will come from Thai operations, including convenience stores and counter services, and fuelled by branch expansion and samestore growth.

CP All should show significant growth next year after disposing of the Lotus stores in China. Earnings next year are projected to surge 104 per cent year on year to Bt3.1 billion, Kim Eng said.

CP All's secondquarter perform¬ance should soften from the first quar¬ter, its usual high season. However, when compared year on year, its quar¬terly profit is forecast to increase 17 per cent to Bt312 million, thanks to the addition of more than 450 7Eleven stores since the third quarter last year coupled with expected samestore sales growth of 6 per cent. 

The average number of transac¬tions for counter services is expected to reach almost 11 million tickets a month from 10 million per month last year, Kim Eng said.

CP All is able to adjust product prices to reflect higher costs, while suppliers also provide support. This enables the firm to maintain margins.

Bualuang Securities has main¬tained its "buy" recommendation for CP All, with a target price of Bt13.80.

The broker assumes CP All will have to consolidate Shanghai Lotus Supermarket by yearend, resulting in an earnings forecast for this year being cut by 16 per cent from Bt2.78 billion to Bt2.33 billion.

"Although the delay could exert shortterm selling pressure for the stock, we fundamentally like CP All based on its earnings visibility backed by a strong recovery in samestoresales growth, a better product mixled improvement in margin and its cost passthrough mechanism. The delay will affect only accounting profit. Internal cash flow will remain unchanged," the broker said.

In a separate paper, Bualuang Securities said CP All entailed only "limited" downside risk related to the economy and had an impressive for¬ward growth profile, in both the short and the long term.

CP All is considered one of the best defensive stocks under coverage. Oil pricedriven inflation and the result¬ing negative effect on purchasing power threaten only a minimal impact on its performance.

CP All can pass through most cost increases to customers without sales quantity falling much.

"Same storesales growth should be sustained at 3 to 5 per cent over the long term, as the market is far from saturated. As such, we expect revenue from 7Eleven stores to expand at a compound annual growth rate of 12 per cent over the next seven years," the broker said.

The divestment of its lossmaking China store should boost 20082009 earnings.

After the divestment, losssharing of around Bt200 million a quarter will no longer be booked in its finan¬cial statements.

KGI Securities (Thailand) has maintained an "outperform" recom¬mendation for CP All, with a target price of Bt13.90 this year.

It sees no significant impact from a delay in Lotus divestment to CP All's fair value, as its earnings and divi¬dend are mainly contributed by con¬venient stores - not Lotus.

However, this makes the consoli¬dated performance more difficult to predict, as unpredictable provision¬ing and reversal related to Lotus typ¬ically could add more errors to con¬solidated earnings.

Apart from CP All's continuous store expansion, the broker is satis¬fied with its attempt to generate traf¬fic in stores, especially its project of installing onlinelotto machines in 7Elevens.

"We believe that this will be anoth¬er critical magnet, like its successful counter service," KGI said.

CP All is expected to post impres¬sive earnings of Bt520 million in the second quarter, up 95.1 per cent year on year, due to margin expansion, lower selling, general and adminis¬trative expenses to sales, and improved samestore sales growth.

The broker predicts the compa¬ny's net profit this year will amount to Bt2.6 billion.