BIGC Supercenter

BIGC Supercenter Plc (BIGC)

BIGC is the least favorable retail stock. Although it is the cheapest retail stock, its profit swings unpredictably every quarter and the business has entered saturation. We reiterate SELL.

- 2Q14 profit beyond expectation thanks to good gross margin 
2Q14 net profit was reported at B1.89bn, growing 50%qoq and 20%yoy (27% beyond expectation, 15% above consensus). 2Q14 gross margin increased by 100bps to 15.2% (better than expected) because supply chain management improved owing to the newly-opened distribution center for Mini Big C; other factor has not been revealed by the company. 2Q14 rental income grew by 8%yoy and normalized margin increased as a result of high margin. Sales income grew by only 3.8%yoy; same store sales fell by 2%yoy due to the political unrest. 

- Not to rebound significantly in 2H14 
1H14 net profit grew by 6%yoy, making up 45% of FY2014 earnings forecast. 2H14 net profit is expected to increase from 1H14 owing to high season; purchasing power would increase and same store sales would rebound. Moreover, BIGC plans to open new branches: one branches of hypermarket, six branches of Big C Market, three branches of Mini BigC and four branches of Pure Pharmacy; more additional branches of Mini Big C might be opened. However, despite better profitability, 2H14 net profit is not likely to improve significantly from 2H13, and positive surprise is not likely to happen like in 1H14. 2H13 profit base was very strong thanks to high non-sales income from commercial income sharing from VGI, subsidies from suppliers, and good control on operating cost. VGI has revised down its growth target to 5%yoy in 2014. In addition, subsidies from suppliers normally depend on sales growth target. 1H14 sales volume was lower than usual yearly sales growth target of 6-7%p.a., so subsidies from supplier would be small. 

- Profit swings every quarter. SELL 
BIGC possesses P/E ratio of 26x (average P/E ratio + seven-year 1SD) is lower than the sector's average of 30x. However, BIGC's profit swings unpredictably every quarter, and the business has entered saturation, so it is not likely to rebound sustainably. Also, the current share price has limited upside. We reiterate SELL.