Karmarts Plc

Karmarts Plc (KAMART)
We expect Karmart’s earnings to accelerate in 2H12 as branch openings and the modern trade increase its cosmetic sales. We expect sales to soar in 2013 as brand recognition picks up, together with continued expansion throughout Thailand and neighbouring countries. We initiate coverage with Outperform and a DCF-based target price of THB11 (12% WACC, 3% LTG). Despite a 75% increase in its share price YTD, we believe there is plenty of upside with low analyst coverage. Short-term catalysts could include increased contributions from the modern trade and franchises and accelerating earnings in 2H. 
Growing footprint in ASEAN
Karmart began selling Korean cosmetics in Thailand in 2009 and gained a 1% market share by 2011. This year, it will triple its branches from 30 to 100, then by 100-120 a year going forward. Additionally, Karmart’s products are sold at 7-11 convenience stores nationwide, which means up to 6,600 more outlets.Karmart is also the first Thai retail stock under our coverage that can easily expand to neighbouring countries, thanks to its flexible franchising system, which can be awarded to foreigners, while others may face legal/regulatory hurdles.
Sales and margins remaining high in the mid-term
We expect sales to reach THB700bn in 2012 and THB1bn by 2013-14, supported by network expansion and growing awareness of its brands. Despite our expectation of heavy competition in the cosmetic industry, we expect margins to stay in the mid-40s through FY12-14, which would be one of the highest among retail peers.
Risk-reward profile
Our risk-reward analysis justifies an Outperform call on Karmart. We like its exposure to fast-growing upcountry markets in Thailand and its ease of expansion to developing neighbours.