Siam Makro

Siam Makro Plc (MAKRO)
Investment thesis: The information we grabbed from our recent field survey and from management at the analyst meeting yesterday confirms MAKRO’s operational excellence and its capability to weather the crisis. We believe it to be a very good quality company which—given a three-year earnings CAGR of 24%—should post one of the most consistently high-growth stock performances on the SET. We maintain our BUY call with a YE12 target price of Bt306.
Operational excellence lifts MAKRO above others: Although the flooding will have washed away some of MAKRO’s 4Q11 profit, the firm has clearly demonstrated operational excellence and capability. It not only successfully minimized losses, but also seized opportunities from the crisis. The product mix was dynamically adjusted to cater to a temporary shift in demand. For example, MAKRO sourced flood prevention products and items for flood victims and for donations, which were sold at stores near inundated areas; its competitors failed to seize the moment. Moreover, despite its DC at Wangnoi being forced to close because of rising waters, MAKRO handled the surge in demand brought on by panic buying and hoarding. Its shelves remained much more fully stocked than the shelves of any other retailer, limiting the opportunity loss.
Small impact from flooding: The flooding appears to have affected MAKRO’s operation less severely than the street expected. Management said that sales at stores near flooded areas rose substantially, which should be more than offset the effect of sharp sales declines at three outlets—Nakornsawan, Ayudhya and Rangsit—which were surrounded by inundated roads. Although about Bt100m in extra expenses related to flooding will be booked in 4Q11, most of the amount will be compensated by insurance and reversed after the payouts, which are expected in 2012. However, to factor in the extra expenses, we have cut our FY11 earnings forecast by 4%.
3Q11 operation recap: MAKRO delivered the second highest SSSG in Thai retail space of 10% YoY in 3Q11 and 8.0% YoY in 9M11. Sales to HoReCa customers remained the major driver with robust growth of 22% YoY in 3Q11. The proportion of HoReCa sales rose to 19.8% in 3Q11 from 19.1% in 2Q11 (18.5% in 3Q10).