High Conviction : CPALL 3Q24: Earnings surprises not yet end

We raise our 2024F and 2025F core earnings by 5% to reflect healthy gross margin and we expect the market to follow suit. Any progress on the second phase of the government’s Bt10,000 handout (meeting on Nov 19) would help sentiment and give earnings upside. We maintain Outperform with a new mid-2025 DCF TP (WACC 7%, LT growth 2.5%) of Bt81 (from 80).

Catalyst #1: 3Q24F core earnings beat estimates. 3Q24 net profit was Bt5.6bn, +27% YoY but -10% QoQ. Excluding Bt570mn one-off expenses (Bt296mn FX loss and Bt274mn FX loss and amalgamation expenses from CPAXT, based on CPALL’s stake), 3Q24 core profit was Bt6.2bn, +44% YoY but flat QoQ, 9% above consensus and 3% above our estimates on a wider gross margin at both CVS and CPAXT. The YoY increase was backed by better sales and margin at CVS and better contribution from CPAXT (+40% YoY, off strengthening in both B2B & B2C).

CVS highlights: SSS grew 3.3% YoY on good response to this year’s stamp campaign running August 24 to November 23, with more tourists and government economic stimulus outpacing the hit from heavy rains and floods. Customer average was 964/store/day (+0.5% YoY) and spending per ticket was Bt84 (+2.4% YoY). Contribution from O2O sales (7-Eleven Delivery, All Online and 24Shopping, included in SSS) was 11% of sales (vs 10% in 3Q23 and 11% in 2Q24). Of total sales, 76.3% was food products (+90bps YoY, thanks to better sales of ready-to-eat chilled meals, fruit and desserts) and 23.7% from non-food products. Stores. In 3Q24, CPALL added 199 stores in Thailand, giving it a net 15,053 stores at end-3Q24, +5% YoY and +1% QoQ; it added 14 stores overseas, giving it a net 107 stores overseas – 98 in Cambodia and 9 in Laos, +47% YoY and +15% QoQ. Gross margin on product mix widened to 27.7% (+70bps YoY, flat QoQ) off a higher food margin (+50bps YoY on more high-margin ready-to-eat sales) and non-food margin (+110bps YoY on better high-margin personal care & healthcare product sales and lower low-margin cigarette sales).

Catalyst #2: 4Q24F earnings to be this year’s high, up YoY and QoQ. In 4Q24TD, we estimate SSS growth at CVS and CPAXT at 2-3% YoY. With robust SSS growth and continued wider margin from more sales of high-margin products (RTE and personal care & health care products for CVS and fresh food products for CPAXT), we expect 4Q24F earnings to be the year’s high, up YoY and QoQ on seasonality.

Catalyst #3: Earnings upgrade; upside from stimulus. We raise our 2024-2025F core earnings by 5%, factoring in a wider gross margin at both CVS and CPAXT and this puts our forecasts 5% above consensus in 2024F and 8% above in 2025F; we expect the market to also upgrade earnings. On November 13, the Finance Minister said the economic stimulus committee, led by the Prime Minister, will meet on November 19 to discuss the progress of the second phase of the Bt10,000 handout scheme, planned as an application on the digital platform. If approved, there will be earnings upside for CPALL, not yet included in our forecast.

Key risks are changes in government policies and purchasing power. Key ESG risks are energy & waste management, sustainable products (E) and product quality management, labor practices and data privacy (S).