“CPALL” Is Driving on a Rocky Road, “Morgan Stanley” Downgrades TP to ฿77

The weak 2H18, especially 2Q18, have hit CP ALL Public Company Limited (CPALL) when Morgan Stanley has downgraded CPALL’s short-term shares from overweight ฿87/share to equal-weight ฿77/share. The weak short-term earning outlook should cause the stock to move sideways.

The downgrade is due to the decelerating growth in service income for its convenience stores and increased domestic competition for Siam Makro Public Company Limited (Makro), while the weak same-store sale growth (SSSG) is the main factor that causedbrings CPALL to miss its margin targetmiss.

 

Morgan Stanley also indicates that the 3Q18 is very quiet for CPALL. The stamp campaign at 7-Eleven isdoes not receivinge the positive responses as much as before. There will be morea challenges for CPALL as both 7-Eleven and Makro had +2% SSSG in 3Q17 and -1% in 2Q17, while the SSSG competition base in 3Q18 is also increasing.

Makro is not performing any better than CPALL, having a flat gross profit margin (GPM) amid negative SSSG and pricing competition along with its losses from oversea investments, resulting in the lowest earnings before interest and tax EBIT margin in nine years at 2.7%.

 

However, Morgan Stanley still favors CPALL in medium-term outlook, giving it the best in its business section and return metrics.

The key factors to drive CPALL are:

1. SSSG and space expansion.
2. Gross profit margins and product variety.
3. Leverage operation.
4. International expansion.