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Investment thesis

Last week, we accompanied HMPRO's CFO, Wannee Juntamongkol, to meet investors in New York, Boston and San Francisco. There was a lot of interest—22 meetings over four days. The fund managers we met seemed to have anticipated slow short-term earnings growth as a result of margin squeeze (only few of them currently have positions in HMPRO). As such, we believe selling pressure after the announcement of slow earning growth for 2H14 will be only modest. We are now more optimistic over the firm’s mid- to long-term outlook, thanks to aggressive ongoing expansion and an improving Mega Home performance.

However, HMPRO's current valuation isn’t attractive enough to take positions right now—PERs of 34x for FY14 and 29x for FY15—so the scope for a share price increase is limited at the moment, in our view. Uncertainties surrounding the Malaysia operation remain, even though we are more positive about the long-term outlook for the venture. As such, our strategy is to wait till the first store in Malaysia posts its first quarterly numbers, which should be for 1Q15.

We have rolled over our investment horizon to YE15, pushing up our DCF-derived target price to Bt10.60 from Bt9.20.

Slow earnings growth in short-term

Slimmer margins present a major headwind to earnings growth in the short-term. GM will decline on a greater revenue contribution from Mega Home, while higher SG&A expenses tied to start-up costs for the operation in Malaysia will squeeze EBIT margin further.

SSSG to decelerate in 2H14

SSSG is likely to start slowing again in late 3Q14, due to cannibalization effects, as all the stores to open in 2H14 will be located in large cities that already host HomePro outlets.

Continued aggressive expansion 

By 2020, the firm targets having 100 HomePro stores in Thailand and 10 in Malaysia, as well as 20 Mega Home outlets in Thailand.

Asset spin-offs likely in late 2H15

HMPRO plans to establish an REIT, which will then lease two HMPRO properties for 25 years, Market Village at Hua Hin and Suvarnabhumi. The transaction may take place late next year after the expansion of retail space at the Suvarnabhumi store is completed.

Mega Home is building scale

After about a year of model fine-tuning, Mega Home’s performance has clearly improved. The firm will start expanding Mega Home again in FY15 and expects it to break even in 2H15. Management also plans to use Mega Home to enter CLMV markets.