Office Mate

Office Mate  Plc (OFM)

Investment thesis
Year-to-date, OFM has rallied by 79% and outperformed the SET by 67% following a strong earnings recovery after its operation normalized. However, at PERs of 32x for FY14 and 25x for FY15, we believe the recovery is already priced in. Moreover, there is downside risk tied to marketing expenses for the official launch of its websites in 3Q14. Given that there is no upside to our YE14 target price, we think now is a good time to take profits. Our rating drops from BUY to HOLD.
Best earnings growth in FY14
OFM's FY14 earnings growth profile of 28% looks to be the strongest in the Retail sector, driven by synergistic benefits from the merger and the low base comparison set by integration problems last year. Management guides that synergies alone will expand the GM of the office supply business by 100 bps this year. This growth momentum should continue into FY15, thanks to recovering consumption spending and business expansion. OFM targets opening eight new Office Mate stores (to 56 branches) and 11 B2S outlets (to 95) this year.
To officially launch online store in late 3Q14
The firm plans to officially launch its online stores (central.co.th and robinson.co.th) in late 3Q14, right after the online distribution center is completed. The DC has capacity to stock up to 120,000 SKUs (from 15,000 SKUs currently), which would be a substantial enough variety of products for the websites. Although OFM is launching its online stores much later than its competitors, the firm expects them to become Thailand’s number one online retailer, due to the large customer base of CRC group—4.5m One Card members. Moreover, it has a cost advantage from sharing logistics costs with the office delivery business. OFM targets online sales of Bt200-300m in FY14, Bt500m in FY15 and Bt1bn in FY16.
Online operation to start eating into profit
The long-term prospects for the online business are good, but in the short- to medium-term it will eat into OFM’s earnings. Once the websites are officially launched, hard marketing campaigns will follow to attract online shoppers. The firm budgets for marketing expenses of Bt30m this year (equal to 10-15% of online sales), while GM is estimated at around 18%. Marketing expenses may exceed OFM’s budget, depending on customer responses and the reactions of competitors. The firm expects the online business to break even in FY16 on sales of Bt1bn.