Siam Makro

Siam Makro Plc (Makro)
Investment thesis
MAKRO is now at an attractive entry price again following a share price drop prompted by disappointing 3Q12 results. Moreover, expansion visibility is now clearer than ever. At the analyst meeting yesterday, the CEO, Ms Suchada Ithijarukul, unveiled long-term targets and said the firm would increase CAPEX and maintain it at a high level for the next several years. We have raised our YE13 target price to Bt512 from Bt466 in order to factor in a higher store assumption. Our rating rises to BUY from HOLD.
3Q12 recap
SSSG was 8.4% in 3Q12 and 9.7% in 9M12. Sales of HoReCa products remained the driver with YoY growth of 23.1%. The HoReCa proportion of the sales mix, thus, rose to 21.3% in 3Q12 from 19.8% in 3Q11, which consequently boosted GM by 11bps YoY to 8.4%. The issue of concern is neither sales growth nor margin, but a spike in the SG&A/sales ratio to 7.2% in 3Q12 from 6.9% in 3Q11 and 6.5% in 2Q12.
The CFO clarified that the YoY rise was mainly due to a higher minimum wage, while the QoQ increase was because of expenses for a HoReCa exhibition, pre-opening costs for new stores and the hiring of food specialists and consultants (mostly expatriates) to expand the food service unit. In our view, most of the expenses will generate future income, so constitute a short-term EBIT margin squeeze for a long-term payoff.
100 stores nationwide?
The CEO announced three more stores (Mukdahan, Satun and Trat), which are likely to open in 1H13. Moreover, MAKRO will debut a new HoReCa-friendly format, a 1,000sq.m frozen shop, in Phuket in order to serve strong demand from HoReCa customers in the area. The CEO did not offer guidance on long-term expansion, but said the firm could eventually have 100 stores nationwide, almost double what it has today.
Regulation is not a big issue, in our view
We are not very concerned about regulations, as they do not stop dead the rollout of large retail stores, but complicate and lengthen the process of opening a store. MAKRO’s track record shows that it can deal with the issue well—it has opened 4-5 stores annually during the past three years.  Moreover, the Makro Retail Alliance program to strengthen small retailers should enable it to get permits easier than other big-format food retailers.
Raising assumption on store roll out
We feel management is more aggressive about expansion. Despite not offering guidance on stores to be rolled out, CAPEX is budgeted to be sustained at Bt4bn a year for several years. Even subtracting the investment in efficiency improvement programs, the remaining amount should translate into 4-6 new stores a year. We have, thus, raised our assumption for new store openings from three to four outlets a year, FY13-15, and from no store openings during FY16-20 to three stores a year.