CP All
Play
Alert: Aggressive Move
Maintain Neutral—The acquisition of Siam Makro (MAKRO) poses both near-term
challenges from debt load and long-term growth opportunities. Based on its past
success track record in Thailand's retail industry, CPALL will likely overcome the
near-term challenges and become a regional multi-formatted modern trade operator
expanding into neighboring countries without waiting for a 7-11 license via the
“cash-and-carry” format.
The Transaction—CPALL announced its BoD's decision yesterday to acquire
64.35% of Makro from SHV Nederland BV and to tender the rest from the market at
Bt 787/share totaling Bt 188.88bn with 90% debt financing and 10% from internal
CF s.t. shareholders’ approval on 12 Jun. The transaction is expected to complete
in Aug. The transaction suggests ~45x PE, ~28x EV, and ~15.7x PBV on 13E basis.
Key takeaways from the Management—CPALL management held a conference
with the following key takeaways: (a) the asset is of good quality and the opportunity
is rare in the current industry conditions, (b) the transaction allows CPALL to be a
multi-formatted modern trade operator with #3 ranking in Asia-exJapan on sales revenue, (c)
it has near-term synergies from stronger negotiation power with suppliers from the
significant sales revenue of the combined entity (Figure 1-2) and better operational
efficiency, (d) it allows CPALL to expand into other ASEAN countries without waiting
for a 7-11 license, and (e) it can unlock hidden-value from Makro’s assets (53
freehold outlets).
Short-term Challenges; Long-term Growth Opportunities—The transaction will
turn CPALL from being debt-free to one with 5.6x D/E and 6.7-7.5x D/EBITDA.
Based on 4% interest cost, CPALL will bear Bt5.5bn interest charge including tax
shield, a level above estimated Makro’s NP’s if no synergy arises. This can be
overcome to keep a flat 13E earnings growth and to maintain stable Bt0.9/share
DPU with 50bp GPM expansion and 20bp lower SG&A-to-Sales—the target that
can be achieved based on its past success track record. (Figure 3) Strategies over
the medium term to lower debt loads range from (a) better land use to drive rental
income, (b) selling some outlets to a setup REIT, and (c) expanding more
aggressively via franchising through Makro’s ~2.5mn-member SME retailers.
Downside risks are a surprise rise in global interest rates, downturn in household
spending sentiments, and regulatory threat against modern trade operators hurting
its earnings growth potential. These would have a clear impact on its debt-servicing
capability leading to an unavoidable capital call.
CP ALL
Valuation
Our TP of Bt44 (29x 2013E-14E EPS average) is based on +2 s.d. the stock's mean
P/E of 18.5x (since 2006) to reflect the company's market leadership and growth
premium derived from its successful penetration track record, sales promotion
campaigns, and the tracking of household spending behavior toward CVS.
Risks
Upside risks to our Neutral call and target price include: 1) granting of a 7-Eleven
license to CPALL in Vietnam; and 2) weaker than expected competition in the CVS
segment. Downside risks to our target price include: 1) intense competition to CVS
from newcomers like Lawson, the Central Group under the JV with Family Mart, and
BigC; 2) change in spending behavior away from CVS, and 3) decline in consumer
confidence hurt by an export downturn or political confrontation.
Siam Makro
(MAKR.BK; Bt682.00; 3)
Valuation
Our TP for Siam Makro of Bt434 (23.4x 2013E-2014E EPS average) is based on +2
the stock's historical average PE of 14.5x (since 2006) to reflect the company's
strong growth in the F&B and hotels & restaurant segments, a HoReCa proxy as
well as management experience in successfully steering the company through
various challenges, such as the 2011 flood, the 40% rise in nationwide minimum
wages, and tighter regulations against modern trade operators.
Risks
Upside risks to our Sell rating and target price include strong growth in sales, driven
by the HoReCa segment and GPM expansion once sales reach a higher threshold.
Other upside risks include accelerated urbanization and recovery in the global
economy.
