Charoen Pokphand Foods (TH: CPF), the food arm of Charoen Pokphand Group, is riding high on its 53% rally this year, but the stock may serve up even more bacon for investors.
The Bangkok-based company’s products include fresh meat, animal feed, seafood products, ready-to-eat meals and processed foods. Poultry, pork and shrimps are its core products. Thailand accounts for nearly one third of the company’s revenues, while other parts of Asia account for the rest.
While this year’s rally is impressive, the road has been rough for CPF in recent years. An underperforming unit and tumbling meat prices halved the stock’s price over the last three years. But things are starting to turn around for the food company.
CPF has taken steps to restructure its shrimp business, which has struggled in recent years. Pork prices are also on the rise, giving the company a revenue boost. These combined factors have given investors a renewed appetite for CPF, contributing to the 53% boom since the start of the year.
Opteck, a binary options trading platform, speculates that improved consumer spending and rising pork prices in Thailand may set the stock up for another rally beyond its current level of THB27.75.
Looking ahead to the long-term, CPF may further benefit from a spike in meat sales in Asia, as incomes continue to rise.
CPF is also trading at 17 times earnings and 1.5 times book value, below its five year-average on both levels.
Analysts are catching on to CPF’s potential, with Warayut Luangmettakul of Credit Suisse labeling the stock a “strong momentum play” in the next few quarters. Luangmettakul projects that a pork supply shortfall, which has boosted prices in Thailand, China and Vietnam, will continue until at least the end of 2016. It takes at least six months to expand production.
Luangmettakul gives CPF an outperform rating and a target price of THB33.
Disease and drought impacted Thailand’s swine population, leading to a 20% increase in pork prices in Q2.
Pork prices have settled in China since June, but recent flooding may shorten supplies and push prices to fresh highs. The Asian nation accounts for about one fifth of CPF’s topline.
In addition to pork prices, market players will also be keeping a close eye on the company’s progress with its struggling shrimp business, which has the potential to break-even this year.
The shrimp unit has been weighing on the company’s earnings for the last three years, as disease outbreak led to losses. But CPF has been restructuring the business, and is gradually making progress with these changes.
Analysts are expecting the company to improve its shrimp output through the downsizing of facilities and a shift toward more profitable products. The restructuring may help the company break-even this year and in 2017, could bring in “significant” profits. The company’s shrimp business accounts for approximately 13% of its overall revenues, and over the last three quarters, has improved operating margins.
Divya Gangahar Kothiyal, an analyst at Morgan Stanley, projects that margins will widen to 12.7% in 2016, up from 11.9% in the first quarter of the year. Kothiyal says the second and third quarters are typically the peak periods for shrimp production.
A recent statement by CPF management indicated that the shrimp and pork businesses are set to push second-quarter earnings ahead of the company’s target. The quarter’s results will be unveiled in early August. Analysts are expecting earnings per share growth of 3.3% for the year and 15% growth for 2017.