Berli Jucker

Berli Jucker Plc (BJC)

Investment thesis: We think BJC is now too expensive. It currently trades at PERs of 29.8x for FY12 and 25.7x for FY13, which is comparable to downstream consumer firms. But BJC’s operation is concentrated in the mid- to up-stream levels of the supply chain, which in our view deserves a lower multiple than downstream firms, as bargaining power at those levels is weaker—both as a vendor and as a buyer. Although BJC is moving downstream, we don’t think it is yet appropriate to price it as a downstream play. With only a modest three-year (FY13-15) CAGR of
16%, we have downgraded our rating to SELL from HOLD.

Rising retail exposure, but from a very low base: After taking over Asia Books (a book and stationary retailer) in FY11, BJC is bidding for a major stake in SFM holding, which holds 50.28% of Siam Family Mart. The bidding result should be clear in early Sept.Moreover, the firm plans to start a pharmacy store chain; the first outlet is to debut early next year. But building exposure in the retail industry is a major undertaking. Even if BJC were to win its bid for Family Mart, it would take time to restructure the operation in order to
compete with Tesco, TOPS and BIGC for second place in the CVS market, while the shortage of pharmacists presents a major hurdle to rolling out pharmacies.

Expanding distribution network: A deal to buy a distributor with a network concentrated in northern Vietnam should be closed by YE12. BJC is likely to take a holding of more than 60% in the distributor. The acquisition will expand its distribution network in Vietnam four-fold to 200,000 sales points, making it the biggest consumer goods distributor in that country. The network would enable the firm to both distribute its products in Vietnam and source Vietnamese products for distribution in Thailand and elsewhere. The model will also be applied to Laos, Cambodia and Myanmar.

Bt10bn to spend: BJC's net gearing ratio stood at 0.6x at end-June; it could rise to 1.2x before we became concerned about debt. That means the firm could spend Bt10bn on acquisitions before it would need to make a cash call. But after checking BJC’s potential deals in the pipeline, we don’t think a capital increase would be necessary for at least two years.