Siam Makro

Siam Makro Plc (MAKRO)
Earnings revision. We raise MAKRO’s earnings by 2% in 2013F, 13% in 2014F, and 20-40% in 2015-24F. Behind this is 1) a 1-2% cut in SSS growth to 7% in 2013-14F and 6% in 2015F; 2) adding in the synergy from CPALL that will boost MAKRO gross margin by 10-15bps in 2014-15F; 3) including a faster store expansion of 7 stores/year (five cash&carry and two small food service stores) from 3-4 stores/year previously, upping goal for cash&carry outlets to 104 (multiple stores in some big cities) and small food service to 18 stores.
2H13F. 1H13A accounted for 45% of our 2013 forecast and we expect a better 2H13. MAKRO’s SSS growth will be less impacted than other retailers by a slowing in consumption as its focus is on necessities. MAKRO plans to open two new cash&carry stores (Chum Phae in Nov 2013 and Nakhon Phanom in Dec 2013) and one small food service store (Rawai, Phuket in Dec 2013), giving it 62 cash&carry stores and two small food service stores at end-2013. Margin improvement will be seen via the rise of sales contribution from the HORECA segment (hotel, restaurants, caterers), growing a high 24% p.a. in 2005-12 and contributing 21.5% of its sales in 1H13A. Focus on the HORECA segment means it assigns more floor space to fresh food and non-food products, for which margins are 1.5-2.0x above dry food products.
LT synergies. MAKRO views that the collaboration with CPALL will support the development of human resources through the Panyapiwat Institute of Management, which will be vital to the success of its business expansion over the longer term. Other synergies include economies of scale and better operational efficiency by way of joint distribution that will improve lead time, reduction of opportunity loss via inventory management, potential for joint product initiatives, raw material sourcing within the group and sharing logistics facilities.
Upgrade to BUY. The earnings revision and rolling over PT to mid-2014 gives a new DCF PT of Bt700 (from Bt550 at end-2013). Based on wider ETR of 23%, we upgrade our rating to BUY from Neutral. Post acquisition, we expect MAKRO’s earnings to grow by 27% (vs. earlier 15%) in 2013-15F, backed by margin improvement from business synergies and the acceleration of store expansion. We note that our assumption for MAKRO’s store expansion of seven stores per year is more conservative than CPALL’s target of 7-11 stores/year in 2014-19. CPALL has no intention of delisting MAKRO, but the small free float means the stock is most likely going to be very illiquid. Key risks are changes in SSS growth, store expansion, and business synergies related to the acquisition.