Office Mate

Office Mate Plc (OFM)

Investment thesis
OFM's long-term outlook remains promising, the 1Q13 hiccup notwithstanding. We expect the integration of Office Mate and Office Club to start building synergies in 2Q13, while the online business—the e-commerce portal for CRC group—is due to launch in 3Q13 and will be the long-term growth driver. Although we have cut our FY13 earnings forecast by 10% and our YE13 target price to Bt75 from Bt82 to factor in the integration problems that made for a poor 1Q13 performance, the upside to our new target price is still attractive. Our BUY rating stands.
Problems have been solved; better numbers ahead
Mr. Worawoot OunJai, the CEO, said at a meeting yesterday that the problems integrating Office Mate and Office Club, which squeezed the 1Q13 performance, have been solved and the operation has been back on- track since April. Note that the shifting of Office Club's catalog sales to Office Mate overloaded its call center and delivery system, causing sales growth to decelerate to only 6.3% YoY (far below the firm’s target of 20%) and margin to be squeezed in the quarter. The abandoned call rate jumped to 9-10% from below 2%—sales opportunities of Bt20-30/month were lost as a result. The percentage of on-time deliveries declined to 92-93% from 99%, which meant extra costs.
Margin should start expanding in 2Q13 onward
The synergistic benefits of pooling the purchase orders of Office Mate and Office Club should start to become apparent in 2Q13. OFM expects to realize greater rebate income from combined sales volume in 2Q13 onward, boosting gross margin by 200 bps. Moreover, GM should fatten further with the introduction of more private label items. OFM targets increasing the proportion of house brands in Office Mate’s merchandise mix from 12-13% currently to 16% in FY13 and to 20% over the long-term. For B2S, it aims to eventually expand the proportion of private labels in the merchandise mix to 15-20% from only 2-3% currently.
To launch e-commerce website in 3Q13
The website, which will be the e-commerce portal of CRC group, has been delayed to early 3Q13 due to complications integrating all the business units under the Central Group umbrella and because the firm would like to make sure that all systems are running smoothly ahead of the launch. OFM targets online sales of Bt4-5bn within the next three years, which we believe is achievable, given that CRC has a large customer base of more than 10m members. However, we don't expect any profit from the online business during the first few years, due to heavy marketing expenses.