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Earnings were as expected

HMPRO reported a 3Q14 net profit of Bt766m, up 6% YoY but seasonally down 3% QoQ. The figure was in line with our estimate, but was 3% below the consensus. 9M14 earnings represent 70% of our FY14 forecast. Note that 3Q14 SSSG was lower than our assumption but the gap was filled by lower-than-expected SG&A expenses.

Results highlights

Sales rose 20% YoY to Bt11.9bn for the quarter, of which around Bt0.73bn were contributed by Mega Home. The standalone sales of HomePro grew 12% YoY, driven by 4.5% SSSG and new stores.

Gross margin for the quarter was 26.2%, down 90 bps YoY, due to the contribution of Mega Home and a slimmer GM at HomePro stores. Although the proportion of private label sales rose to 21.2% in 3Q14 (20.6% for 9M14) from 20.6% in 3Q13, HomePro’s gross margin was still squeezed by 40 bps YoY to 26.7% on a diminished proportion of soft-line sales (as a result of the consumption slowdown). 

SG&A expenses presented a positive surprise. They were lower in both absolute (down 4% QoQ) and common size (down 68 bps QoQ) terms, thanks mainly to improved efficiency and the building of economies-of-scale at Mega Home.

Outlook

4Q14 looks set to be another slow-growth quarter. Although we expect the performance of HomePro stores in Thailand to improve and the loss at Mega Home to gradually ease, losses at the Malaysian operation and marketing expenses for brand-building after the store opens in November present a major headwind to the bottom-line.

What’s changed?

Our forecasts and target price stand unchanged.

Recommendation

We like HMPRO’s long-term growth story, but we don’t think now is a good time to load the stock into portfolios, as uncertainty continues to surround the Malaysian operation. We recommend waiting until the inaugural store in Malaysia posts its first quarterly numbers, which should be in early 2015.