Siam Makro

Siam Markro Plc (MAKRO)

Investment thesis: We have upgraded our YE12 target price to Bt330 from Bt306 because of an improved medium-term growth outlook. MAKRO looks to be the best play in the sector at the moment. The stock currently trades at the cheapest FY12 PER of only 17.8x (the peer average is 23.6x), offers the highest dividend yield of 5% (versus a mean of 2.7%) and is expected to deliver the second-highest EPS expansion in consumer space.
Sustainable long-term growth in blue ocean: The most important factor making MAKRO one of our favorite retailers is its strategy to expand its HoReCa customer base. Sales to the HoReCa segment have grown at a 7-year CAGR of 24% (FY05-11) and should sustain momentum or even accelerate during the next several years, as the firm has no real competitor, a wider range of products and services and a new store format.
Encouraging margin trend: Given that HoReCa products, particularly non-food items, carry much fatter margins than groceries, the higher the proportion of HoReCa sales, the fatter the margin. This story may not be so different from those of other leading retailers under our coverage, such as CPALL, HMPRO or ROBINS. But the impact of the fatter margin is much more exciting for MAKRO than for any other retailer, due to the low base effect.
2nd-highest sales per sq.m in the sector: The firm’s efficiency is much greater than the market perceives. We have seen strong improvements in its sales per floor area over recent years, particularly since the introduction of a HoReCa-oriented store format in 2009. Sales per sq.m now rank second in the sector, just behind CPALL.
Still rolling out: MAKRO’s expansion plan is the least visible in the sector, as management normally doesn’t offer long-term expansion plan guidance—only three stores in 1H12 have been disclosed. That causes most analysts (including us) to make conservative assumptions for new outlet openings. But based on our study of its historical record, we now believe that MAKRO will open 15-20 new locations. As such, we have raised our assumption for the number of new stores to open per annum in FY13-15 to three from one.
Outlook
SSSG remained strong in 4Q11: While logistics problems and supply shortages during the flooding hurt the sales of many retailers, we expect MAKRO to post good 4Q11 SSSG of 7%, which would make for 7.8% for FY11. The shuttering of its DC at Wangnoi seems to have had only a modest impact on its operation. MAKRO could still deal efficiently with merchandising and logistics difficulties, so its shelves remained much more fully stocked than those of any other retailer, limiting the opportunity cost. Moreover, the surge in sales at stores near flooded areas would have more than offset the effect of sharp declines in sales at three outlets—Nakorn Sawan, Ayudhya and Rangsit, which were surrounded by inundated roads.
Momentum continues: We expect SSSG to sustain momentum into this year. Based on real private consumption growth of 4%, inflation of 5%, subdued but continued sales growth to mom-and-pop stores (which buy from MAKRO) and sustained sales expansion momentum for HoReCa products, we forecast MAKRO’s FY12 SSSG at 7%; we anticipate that 2H12 growth will be slightly higher than 1H12 growth, due to the price-inflation effect. Note that expected SSSG is lower than nominal projected consumption growth of 9%, as the prices of many necessity and commodity products in modern trade are strictly controlled by the government.