Home Product Center
Flat growth foreseen in the rest of 2014. Downgrade to SELL
Home Product Center Plc (HMPRO)
- Loss from new outlets and political unrest suppress 1Q14 profit
1Q14 profit was sluggish at only B726m, falling 21%qoq on seasonal effect and
increasing only 5%yoy, marking a record low in several years. The reasons were
the company began to book an expense from the first HMPRO outlet in Malaysia
that is opening at the end of this year and loss from newly opened Mega Home
outlets (two in 1Q14, totaling four at present) has made SG&A/sales increase
110 bps from 1Q13 to 23.7%, resulting in a net margin dropping to 6.6% from
7.4% in 1Q13. Total sales still grew 18%yoy as opening of new stores helped to
compensate for same-store-sales that could grow only 2%yoy as a result of the
political turmoil. Gross margin has risen from 25.7% in 1Q13 to 26.1% in this
quarter from an increase in the proportion of high margin house-brand products
by 20 bps to 20.7% of total sales.
- Flat growth foreseen in the rest of 2014. Forecast cut is likely
The profit outlook for the rest of the year would remain dull like 1Q14, with
insignificant growth year on year. Accordingly, a further forecast cut is likely,
from the present FY2014 net profit growth estimate of 14.4%yoy (near the
consensus). Under the current assumption, FY2014 net margin is projected to
lower 20 bps from last year to 7.4%, which is substantially above 1Q14 net
margin because SG&A/sales would be higher than 22.8% previously projected
due to the expense on Malaysia outlet and loss from Mega Home outlets of
totaling B100-150m this year, or 0.2-0.3% of sales. Strong sales growth would
not be able to negate the above-mentioned negative factors since 2Q14 samestore-
sales would improve only slightly from 1Q14 as a result of the economic
slowdown.
- Fully valued. Downgrade to SELL
HMPRO has risen until fully valued, with 2014 expected P/E ratio of 28x, higher
than the past average of 26x. The flat profit growth would hinder the share price
from continuously outperforming. As the share price is still high, we downgrade
our recommendation from HOLD to SELL.
