Commerce

Commerce 

 

In Jan-Feb 2015, consumption sentiment (CCI) was eroded by concerns about economic recovery, and the sector’s SSS growth is unchanged from 4Q14’s at -0.5% YoY. We expect SSS to be better in 2H15, led by speedier government budget disbursement that will spur market sentiment and more stable agricultural price trend. With the return of SSS growth (+3%), store expansion (+10%) and wider EBIT margin (+40bps), we expect sector core earnings to grow by 20% in 2015, mostly 2H15. We like CPALL and ROBINS because of their better 1Q15F results (up YoY and QoQ). 

4Q14 recap: Slow improvement. Sector core earnings showed a slight rise of 7% YoY, as store expansion and stable margin made up for low SSS growth, and a stronger rise of 31% QoQ from seasonality. Sector SSS growth was -0.5% in 4Q14 (vs. -0.1% in 4Q13 and -2.1% in 3Q14), the fifth quarter of contraction on slow recovery in consumption for mid- to low-income earners upcountry. Store expansion continued, adding 10% YoY. EBIT margin was flat YoY at 8.2%. In the quarter, CPALL did best in core growth (+14% YoY) as lower expenses from the MAKRO deal aided margin; GLOBAL was weakest (-12% YoY) on a margin narrowed by higher depreciation expenses from asset revaluation in 1Q14.  

Consumption indicators lackluster in 2015TD. In Feb 2015, the CCI fell for the second consecutive month to 79.1 from 80.4 in Jan 2015, reflecting market concerns on economic recovery. In Jan 2015, the Private Consumption Index slipped 0.1% YoY and the Farm Income Index fell 10% YoY, hit by lower agricultural prices (-11% YoY) mainly rubber (-30% YoY), amid stable agricultural production. Government disbursement was slow at Bt80bn or 19% of the budget in 5MFY15 (Oct 14-Feb 15) vs Bt138bn or 32% in 5MFY14.  

Weak SSS growth in 2M15. These factors ate into sector SSS growth and in 2M15, this was -0.5% YoY vs. -0.4% in 1Q14 and -0.5% in 4Q14. MAKRO had the best SSS growth at 2-3% YoY, thanks to better growth in fresh food products. SSS growth for BIGC, CPALL and GLOBAL was 0-1% YoY. On the flip side, ROBINS’s SSS contracted 5-6% YoY mainly from a change in tourist profile (high-spending Russian tourists plunged 46% YoY in Jan), and HMPRO’s SSS growth contracted 1-2% YoY mainly from store cannibalization.  

2H15 better. We expect sector SSS to improve in 2H15. Consumption sentiment will improve once the government speeds up budget disbursement to meet its targeted 87% in FY2015F plus more stable agricultural prices. In 2015, we estimate sector SSS growth at 3.0% (from  -1.0% in 2014), backed by private consumption growth of 2.3% (from 0.3% in 2014) in 2015. This, together with store expansion (+10%) and better EBIT margin (+40bps) will lead to sector earnings growth of 20% in 2015 from -2% in 2014. To accommodate the slower than anticipated revival YTD, we have trimmed forecasts for CPALL by 3% and GLOBAL by 4%. This lowers CPALL’s TP to Bt52 (from Bt55) and GLOBAL’s to Bt13.5 (from Bt14).  

Top picks: CPALL and ROBINS. We base this on their better 1Q15F earnings (up YoY and QoQ) on factors other than SSS growth, which is still slow. CPALL’s profit will improve without last year’s costs from the MAKRO deal, which includes lower cost of funds after debt refinancing. ROBINS profit will go up on higher rental income from new lifestyle centers. GLOBAL is expected to report flat YoY earnings from better SSS and margin offset by steel inventory loss but rise QoQ from high season for construction material sales. BIGC, HMPRO, and MAKRO will report a slight improvement YoY but drop QoQ from seasonality (Figure 5).