Big C Supercenter

Big C Supercenter Plc (BIGC)

Investment thesis
We expect BIGC to outperform the sector during the next few weeks, as its soon-to-be-announced 1Q14 earnings now look likely to be stronger than most of the other retailers under our coverage. Its YoY profit growth should rank second in the sector, just behind MAKRO, while the valuation is now the cheapest of our coverage—an FY14 PER of 20.9x versus a peer mean of 27.7x. We maintain a BUY rating with a YE14 target price of Bt204.

Expect good 1Q14 profit

Although BIGC’s same-store sales contracted 2.1% YoY in 1Q14, we still expect it to report a good profit of Bt1.56bn for the quarter, up 12% YoY but seasonally down 41% QoQ. The drivers of the expected YoY bottom-line growth were branch expansion (a 4.3% YoY rise in sales space), greater rental and service income (up 8% YoY on higher rents and a larger rental area), de-gearing and lower interest rates (interest expenses fell 21% YoY).
Building market share
BIGC’s SSS dip of 2.1% in 1Q14 may look weak, but it is much stronger than the number for its head-to-head rival, Tesco, which posted a 9.1% SSS drop for the Dec 2013-Feb 2014 period. One reason for its SSS outperformance of Tesco since 2Q13 is that Tesco has greater exposure in the provinces, where consumer spending power has slumped in tandem with lower crop prices and the govt’s failure to honor its rice pledging scheme payment obligations. Note that provincial hypermarkets comprise 51% of BIGC’s store numbers, but they comprise 86% of Tesco’s.
Moreover, BIGC’s Extra format (now 15 stores), converted from Carrefour stores and focused on mid- to high-income demographics in Bangkok and big cities, have performed well, contributing modest SSSG to the firm.
Profitability is the priority—margin improvement in progress
The current mission is to improve profitability rather than expand revenue. In this weak consumption environment, BIGC’s expansion has been limited to its most profitable formats, such as hypermarket and BigC Market, while the rollout plans for new businesses—particularly Mini BigC, which has yet to make a profit—have been scaled back.
Moreover, management plans to enhance profitability through efficiency improvements along the supply chain, which is the heart of a retail business. The slated 2Q14 completion of a new DC, which was optimally designed to serve Mini BigC, should increase the financial viability of Mini BigC in 3Q14 onward, while the new fresh food DC (which will replace two small DCs in 4Q14) is expected to substantially boost overall margin next year, as it will help build economies-of-scale and expand DC centralization fee revenue from suppliers—suppliers save on the cost of shipping products because they have to deliver to only one location. We assume that margin will fatten in 2H14 and expand further in FY15.