Big C Supercenter

Big C Supercenter Plc (BIGC)

Investment thesis: BIGC’s story in the short- to mid-term has a paucity of exciting catalysts. Growth has reverted back to organic slow mode, where it will stay for the next 12-18 months until a new wave of expansion kicks in (if BIGC can execute its plan). As such, despite the 7% share price drop yesterday, we maintain our HOLD rating with a YE12 target price of Bt228.
2Q12 results—end of positive surprise story: Posted 2Q12 SSSG of 1.6% (2.5% for 1H12) was slightly below our estimate of 2%, but the most negative surprise was margin, which declined for the first time since BIGC bought Carrefour Thailand—GM fell by 87 bps YoY and 152 bps QoQ. It seems that there aren’t any more synergies to be built from integrating Carrefour Thailand, while price competition with Tesco has intensified. BIGC launched many hard price promotion campaigns during the quarter, but the result (subdued sales growth and squeezed margin) was unimpressive.
Slow organic growth in short- to mid-term: We do not expect a considerable increase in margin in the medium-term, as sales won’t grow strongly enough to extract bigger rebates from suppliers. Major revenue growth from new wave of aggressive expansion won’t start till FY14. Moreover, intense price competition with Tesco will remain a margin headwind going forward. As such, 3Q12 should be the last quarter of super-strong YoY growth (low base effect). After that, we expect the bottom-line to rise organically at a rate of about 10%.
Exciting story has yet to kick off: At the analyst meeting yesterday, BIGC confirmed the plan to have 300 large-format (hypermarkets and supermarkets) stores and 950 Mini Big Cs by YE16 (up from 124 and 76 outlets, respectively, at end-June). However, management declined to offer guidance on how many stores will debut next year, except to say that the number would ramp up. In our view, the expansion plan remains unclear and we doubt that the street would price in all BIGC’s targets unless (and until) the firm delivers much more aggressive expansion next year, probably more than 25 large format stores. Note that we have modeled for only 50% of what management expects.