Siam Global House

Siam Global House Plc (GLOBAL)

 

After lagging its sector for over a year, GLOBAL has in the past three months outperformed the SET by 40% and its sector by 30% spurred by the solid earnings turnaround in 2Q15 (+37% YoY vs. the sector’s +19% YoY). This will continue in 3Q15, when it will be #1 in the sector with the best core earnings growth at 38% YoY, with a wider gross margin and store expansion offsetting SSS contraction. In 3Q15, we expect its gross margin expansion to top the sector. Progress on its moves overseas will add more positive catalysts. Maintain BUY with a mid-2016 DCF PT of Bt13.5.  

 

3Q15F earnings. We estimate 3Q15F net profit of Bt180mn, +38% YoY but -32% QoQ. Removing the extra item in 3Q15F (steel inventory loss, entirely offset by FX gain) and the extra gain of Bt27mn in 2Q15 (reversal of steel inventory loss of Bt21mn and FX gain of Bt6mn), its normalized profit will be Bt180mn, +38% YoY but -24% QoQ. Backing the sharp YoY growth is a sizeable gross margin improvement from more favorable product mix, better private brand sales and store expansion that will more than offset its negative SSS growth. The drop QoQ is seasonal. 3Q15 earnings will be released on Nov 12. 

 

3Q15F details. We expect a contraction in SSS of 3.5% YoY (vs. -7% in 3Q14 and +4% in 2Q15), dragged down by the drop in sales of construction materials (30% of sales) since government projects take a breather during the rainy season. GLOBAL opened one new store in Nakorn Nayok in 3Q15, raising total stores to 35 at end-3Q15, +15% YoY and +3% QoQ. Gross margin will continue to show the sector’s greatest improvement, widening further to 18% in 3Q15F (+260bps YoY and +130bps QoQ). This will be backed by: 1) more favorable product mix on a drop in low-margin construction material products; 2) continued higher contribution from private brands - with a margin of ~40% vs. the 12-13% for other brands – via using more direct salespersons and adjusting packaging. 

 

4Q15F outlook. We expect earnings to improve both YoY and QoQ, backed by better SSS growth from more construction activities after the crop season ends and a boost in rural consumption from the new government measures, more vigorous expansion, and continued wider margin from better management of private brands. Meanwhile, GLOBAL will start to book earnings (about 2% of earnings) from GLOBAL House International (50% held by GLOBAL and 50% by SCC) in Souvanny Home Center in Laos.  

 

Overseas expansion. The announcement of its investment in Laos in late Sep 2015 is just the beginning of its overseas expansion. GLOBAL continues to work on investment in Myanmar and Cambodia, which it sees as offering an attractive market size that is suitable for its format, with similar customer preferences and thus product assortment. A key advantage compared to other Thai retailers for overseas expansion is support from SCC in terms of market knowledge, and from local partners for land acquisition and local staff management. GLOBAL maintains its stance that any investment overseas will be earnings accretive within the first year.