Siam Makro

Siam Makro Plc (MAKRO)

Highlights from analyst meeting:

- MAKRO said its SSS growth was 7.1% in 3Q13 and 7.6% in 9M13. This was backed by higher contribution from all products: dry food (+4% in 9M13), fresh food (+21% in 9M13) and non-food (+3% in 9M13). Of total 9M13 sales, 64% came from dry food, 23% from fresh food, and 13% from non-food products. Sales have not shown any adverse effect from the consumption slowdown in 4Q13TD.
- Gross margin expanded by 40bps YoY in 3Q13, backed by the continued rise in sales to the HORECA segment (HOtel, REstaurants, CAterers), accounting for 22% of sales in 9M13 from 20% of sales in 9M12. 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.
- At the end of 3Q13, MAKRO had 60 cash & carry stores and 1 small food service store. After opening four new stores in 9M13, it will open three more in 4Q13: at Chum Phae (classic format, ~7000 sqm, in Nov), Nakhon Phanom (classic format, ~7,000 sqm, in Dec), and Rawai (food service store, ~2,000 sqm, in Dec). It will open three new stores in 1H14: at Koh Pha-ngan (food service, ~2000 sqm, under construction), North Pattaya (food service, ~3000 sqm, licenses obtained), and Bueng Kan (classic format, ~7000 sqm, licenses obtained). MAKRO is not yet looking at going abroad in 2014. It has targeted CAPEX at Bt9bn in 2014F (from Bt5bn in 2013F), implying that it will accelerate its store expansion next year from this year’s seven.
- Business synergies with CPALL (i.e. product cross-selling, bargaining power with suppliers from economies of scale, logistics) are being worked out. MAKRO expects this to be seen next year at the earliest.

Maintain BUY. We maintain BUY with mid-14 DCF PT at Bt35. We like MAKRO for its more resilient SSS growth than other retailers during a consumption slowdown, seasonally better 4Q13F ahead, continued margin and store expansion, and the upcoming business synergies with CPALL. 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.