Home Product Center

Home Product Center Plc (HMPRO)

Investment thesis
We believe HMPRO is a good recovery play for 4Q12. Its share price has underperformed the SET by 9% since early April when weak demand for home products set in. But that underperformance phase has already ended; demand is back on-track and the growth profile now looks stronger, led by a more aggressive expansion program. Its valuation is also attractive—an FY13 PER of 23.9x versus a peer average of 26.3x. We have added HMPRO to our top BUY list in Thai Consumer space. We have increased our YE13 target price to Bt14.70 from Bt14.10 following an earnings forecast upgrade prompted by the aggressive expansion plan.

Demand bounce back
After posting slow SSSG for two consecutive quarters (2.7% in 2Q12 and 2.2% in 3Q12), we expect SSSG to rebound back to a sustainable level of 7% in 4Q12 with the traditional post-rainy season surge in demand for home products. SSSG might also get a boost from the release of pent-up demand that was delayed by fears that there might be flooding this year.

Rising demand in the provinces
The expansion of leading residential developers upcountry combined with rising incomes should accelerate an ongoing provincial lifestyle shift and facilitate demand for standard houses and home decor. HMPRO should benefit more than any other home improvement retailer as these developers target mid range to high-end price segments, the same market demographics that shop at Home Pro outlets.

Accelerating rollout; 80 stores by YE16
The three-year plan (FY14-16) is to expand to at least 80 locations by YE16. That means HMPRO will have to open 6-8 new stores a year during FY14-16, more than our previous assumption of five stores annually. As such, we have raised our assumption in line with the new guidance, which consequently results in 4%, 6% and 8% respective upgrades to our FY14-16 earnings forecasts.

To launch a fighting brand?
HMPRO is studying the feasibility of launching a new store format with a new brand that will cater to small contractors (similar to GLOBAL or Thai Watsadu). This new format should be considered a fighting brand that competes with low-cost home improvement retailers. We think it would be a smart move.

Balance sheet not a concern
CAPEX will remain Bt5-6bn a year to cover the aggressive roll out plan. We aren’t worried about the balance sheet; net gearing should peak at only 0.5x in FY13. Although HMPRO might roll out new fighting-brand stores, we think the balance sheet could handle the opening of 15 such outlets over the next three years, based on a net gearing cap of 1.0x.