Home Product Center

Home Product Center Plc (HMPRO)

Investment thesis: We hosted a group meeting last week with HMPRO CFO, Wannee Juntamongkol, at which she updated us on operational issues, the post-flooding situation and gave guidance on the firm’s sales outlook and expansion plan. In our view, there is scope for upside to our profit forecast, led by a post-flooding demand surge, branch expansion and a fatter margin.
Robust same-store-sales growth: The CFO guided that HMPRO should achieve its FY11 SSSG target of 7%, even though eight stores were shuttered during the flooding. That implies 4Q11 SSSG of 7%, which would be higher than our previous estimate of only 2%. We, thus, have revised up our 4Q11 SSSG assumption to be in line with the guidance and have consequently cut our FY12 SSSG number from 11% to 8.8%, which reflects the higher base set by FY11.
Post-flooding demand surge: Ms Wannee said that as soon as the waters receded, sales jumped at stores in areas affected by the flooding. But shortages of some merchandise items remain a problem—demand surged and some suppliers will not restart production until 2Q12. The opportunity cost, however, should prove minimal, as HMPRO found substitute items.
Margin uptrend: The CFO expects the proportion of house brands in the sales mix to increase from 18% last year to 20% in FY12 and 25% in FY14 with the launches of new house brands, which have proved very popular with customers in second-tier cities. The margins for private labels are typically 10% higher than for non-house brands, so GM should keep expanding.
Heavier store roll-out: The market currently expects HMPRO to open eight stores this year, then normalize the roll-out rate back to five outlets in FY13. But based on what we heard at the meeting, we now think eight new stores/year will become the new roll-out norm, thanks to HMPRO’s enhanced capability and the fact that there is considerable room to expand further.
4Q11 preview: We expect 4Q11 earnings of Bt540m, flat YoY but up by 8% QoQ. This pace of growth may seem unexciting. But the numbers were squeezed by extra expenses related to the flooding and because about half the revenue from second period of Homepro Expo (Dec 10-16) will be booked to the 1Q12 accounts.