Siam Makro

Siam Makro Plc (MAKRO) 

 

In contrast to other retailers – who are cutting or simply maintaining expansion plans - MAKRO has raised its expansion in 2015 to 14 new stores, a new record. Backing this is new opportunities in Thailand and support from major shareholder CPALL. Gross margin will widen from more high-margin HoReCa sales and lower sales of low-margin alcohol and tobacco products. We estimate two-year growth of 21% (vs. sector’s 18%) from better sales growth via more expansion and wider margin. BUY with a new DCF PT of Bt50. 

 

Raised store expansion target. MAKRO revised up its 2015F store expansion to 14 new stores (9 cash and carry and 5 food service stores) from 12, its highest ever, after expanding by 13 in 2014 and 3-7 in each of 2009-13. This will give it a total of 91 stores (82 cash and carry and 9 food service stores) at end-2015. After opening six new stores in 1H15, it plans five more in 3Q15 and three in 4Q15. In July this year it introduced a new store model in Town-in-Town Bangkok, a food service store in a commercial building, close to its HoReCa targets. If successful, it will use this model for future expansion. 2015F CAPEX is budgeted at Bt8bn; most is designated for store expansion.  

 

Overseas expansion. Expansion overseas, focusing on CLMV, is still under study. It is in talks with a local partner in Myanmar. 

 

SSS growth still weak, but up slightly in July. SSS growth was -0.9% in 2Q15 (vs. +6.3% in 2Q14 and +2.8% in 1Q15), hit by the economic slowdown and cannibalization. By segment, fresh food SSS grew 11% YoY, whereas dry food SSS and non-food SSS slipped by 4% YoY and 5% YoY, respectively. Of total sales, 61% came from dry food, 28% from fresh food and 11% from non-food products. In July, SSS growth was slightly better at close to 1% (similar to its SSS growth in 1H15). 

 

Gross margin to improve further. In 2Q15, gross margin widened 70bps YoY without the provisions on chilled food recorded in 2Q14, plus a continued rise in high-margin fresh food sales via a larger HoReCa segment and a drop in sales of low-margin dry food i.e. alcohol and tobacco. Sales to the high-margin HoReCa segment picked up 17% YoY in 1H15, raising contribution of HoReCa to sales to 23.5% (+120bps YoY). After the widening in gross margin to 11.0% (+78bps YoY) in 1H15, a better product mix will support margin further in 2H15. 

 

Maintain BUY. After trimming SSS growth but raising expansion and margin, we maintain our earnings forecast. Our new mid-2016 DCF PT is Bt50, rolling over from Bt45 at end-2015. We expect earnings to improve HoH in 2H15 on seasonality. We like MAKRO for its outstanding growth of 21% p.a. (vs sector’s 18%) in 2015-16F. Behind this is stronger sales growth (+11% p.a.) from aggressive store expansion and moderate SSS growth and improvement in gross margin (+50bps in 2015F and +20bps in 2016F) from a better product mix. Key risks are illiquidity from small free float, change in SSS growth and expansion.