Siam Makro

Siam Makro Plc (MARKO)

 

MAKRO is continuing its rapid expansion, committing itself to at least nine new stores in 2015. SSS growth rose slightly to 2.7% in 2015TD (sector’s best so far) from 0.1% in 4Q14 thanks to better growth in fresh food sales (26% of sales) with stable dry food and non food products. Margin improvement via the rise in high-margin HoReCa segment will continue. With the return of SSS growth, better margin, and store expansion, we estimate two-year growth of 21%. Maintain BUY with a new PT of Bt45. 

Store expansion to stay high. MAKRO successfully executed its aggressive expansion plan of 13 new stores (11 classic and 2 food service stores) in 2014, lifting overall stores to 77 (73 classic and 4 food service stores) at end-2014. MAKRO plans to keep store expansion at a high level, committing to at least nine new stores (six classic and three food service stores) in 2015. In 1H15, it will open six new stores: Kalapapreuk Bangkok (Jan), Yasothorn (Feb), Maha Sarakham (Mar), Fang (Apr), Nakorn Nayok (May), Nakorn-In Bangkok (June). It has secured licenses to open three new stores in 2H15: in Thung Song, Ko Chang, and Rayong. 2015F capex is budgeted at Bt8bn and will be spent on store expansion, site acquisition, a new office building and maintenance.  

Overseas expansion. The study will close soon. MAKRO is eyeing Vietnam, Myanmar, Indonesia, Malaysia and the Philippines. It has not yet finalized the store formats (classic or food service) or the form of expansion (greenfield or M&A).  

Better SSS growth YTD. MAKRO’s SSS growth was 0.1% YoY in 4Q14, braking from 8.6% in 4Q13 and 3.8% in 3Q14. This was partly due to last year’s high base on the sale of alcohol and tobacco ahead of the rise in excise tax and a drop in dry food and non food product sales brought by the overall slowdown in the market. In 2014, SSS growth was 4.3% YoY. In 4Q14, by segment, fresh food SSS grew 11% YoY (vs. +13% in 2014), with dry food SSS slowing to -3.1% YoY (vs. +2.4% in 2014) and non-food SSS to  -3.7% YoY (vs. -2.6% in 2014). Of total sales in 2014, 63% came from dry food, 26% from fresh food, and 11% from non-food products. In 2015TD, SSS growth has risen slightly to 2.7% (the sector’s best thus far), with better growth from fresh food amid stable dry food and non food products.  

Improving margin. In 2014, net operating margin expanded by 20bps, mainly from operational improvement. Sales to its high-margin HoReCa segment, assigned more floor space for fresh food and non-food products, picked up 15% YoY in 2014, raising contribution from HoReCa to sales to 22.8% (+100bps YoY). Margin for fresh food and non-food products is generally 1.5-2.5x above dry food products. Note that in 2014, MAKRO estimated margin would increase by 16bps from synergy with CPALL via joint buying, which would then be offset by a 16bps fall in margin from a change in its accounting treatment for cost of goods sold.    

Maintain BUY. We trimmed earnings by 3% in 2015 and 5% in 2016, mainly to reflect the slow revival of SSS YTD. With this, our new DCF PT is Bt45 (from Bt47). With a return to SSS growth (+4% p.a.), better gross margin (+20bps p.a.), and continued store expansion (10 stores p.a.), we estimate two-year EPS growth of 21%. Key risks are illiquidity from small free float, change in SSS growth and expansion.