Siam Makro

Siam Makro Plc (MAKRO)
Investment thesis: We have upgraded our YE12 target price to Bt424 from Bt380, as we believe terminal growth of 3% should be applied after FY20 rather than after FY15 (as in our previous model). FY16-20 MAKRO earnings growth should remain good at a 12% CAGR, even though we assume that no large stores will open after 2015. Our BUY rating stands.
Threat of new regulation: A highlight of yesterday’s analyst meeting was the threat of a new law coming into effect by 2015 that would prohibit the construction of commercial buildings larger than 2,000sq.m. That would severely limit MAKRO’s scope for expansion after 2015, as most of its formats exceed 5,000sq.m. However, the proposed law might give provincial level govt the authority to decide, in which case some provinces might allow new big retail spaces to be built.
Aggressive expansion to kick off? Management didn’t offer guidance as to how many stores will open—except only one outlet in 2H12—but we smell an aggressive expansion ahead of the proposed new law going into effect (a similar scenario as in 2007, when MAKRO opened 12 new locations, due to the threat of a Retail and Wholesale Business Act). There is further evidence supporting our thesis—a jump in SG&A expenses in 1Q12 because of a major rise in staff numbers at MAKRO’s head office. We believe the firm is preparing for an aggressive FY13-14 rollout.
Story continues: If our thesis of an aggressive expansion in FY13-14 plays out, MAKRO's strong growth momentum should continue until 2018-19, led by above-average sales growth at new stores during the first five years. After that, the new 100sq.m frozen food shop format will be a key driver of long-term growth. MAKRO expects to roll out at least three frozen food shops this year and more thereafter.
Solid growth momentum: Despite higher SG&A expenses with the increased headcount and the minimum wage increase (effective April), we expect robust earnings growth momentum to continue, led by strong SSSG and margin expansion. 1Q12 SSSG was 11.5%, despite lower raw food prices and supply shortages as a consequence of flooding. The 2Q12 SSSG outlook is promising, driven by beverage sales expansion triggered by hot weather.