Big C Supercenter

Big C Supercenter Plc (BIGC)

Investment thesis
Beat estimate by 18%
BIGC reported a 2Q14 net profit of Bt1.9bn, up by 20% YoY and 50% QoQ. The result beat our estimate by 18% and the consensus by 13%, due mainly to fatter-than-expected gross margin.
Results highlights
Sales rose 4% YoY to Bt31.1bn, driven purely by new store openings. Same-store sales grew in April to early May, but the impact of the post-coup curfew squeezed 2Q14 same-store sales by 1.2% YoY. Rental income rose 8% YoY to Bt2.4bn, led by expanded rental area and a higher mean rental rate.
Gross margin was 15.2% in 2Q14, up from 14.2% in 2Q13 and 13.3% in 1Q14. Management said that a factor pushing up GM during the quarter was DC centralization (part of the supply chain development program). BIGC successfully negotiated with suppliers—who had previously delivered products directly to stores—to instead ship products to BIGC’s DCs. Suppliers saved on transport costs and BIGC charged more DC fees (note that there is a one-time “DC entry fee” followed by modest regular DC fees).
This impressive gross margin pushed up EBITDA margin to 11.5% in 2Q14 and 10.6% for 1H14. BIGC maintains its FY14 EBITDA margin target unchanged at 11.1%.
Outlook
3Q14 sales are likely to be seasonally soft, while we don’t think gross margin for the quarter will be as fat as it was in 2Q14, as the supplier rebate is normally low in the third-quarter and DC entry fee income might not be as large as in 2Q14. Strong earnings should resume in 4Q14, driven by seasonality and greater supplier rebate income.
What’s changed?
We maintain our forecast and target price unchanged for now, but may revisit our model after the analyst meeting on Friday if any new interesting information comes to light.
Recommendation
The impressive 2Q14 earnings may generate positive sentiment toward BIGC in the short-term. But the current valuation—an FY14 PER of 24.9x—looks stretched in the absence of a bottom-line forecast upgrade. Our HOLD rating stands.