CPALL

Weak SSS growth, company-specific (stamp program). In 3Q14, SSS hit a record low of -4.5% YoY (vs. +4.6% in 3Q13 and +0.5% in 2Q13), mainly off last year's successful stamp promotion and partly from the economic slowdown. In 9M14, SSS contracted 

-1.7%. In 4Q14, CPALL expects SSS growth to improve from 3Q14, with the negatives from last year's stamp promotion hanging on until end-Nov balanced by positives from last year’s low base (+1.5% in 4Q13) brought by low beverage sales from the unusually cold weather. In 3Q14, food product sales (72% of sales) were better than non-food (28% of sales). In 2015, without the stamp campaign and with the return of purchasing power, CPALL expects SSS to grow 3-5% YoY. It strategy will be to place greater emphasis on food products (ready-to-eat meals, not just snacks), health and beauty products and differentiated products (only at 7-Eleven stores).

Stable margin in ST without support from stamps. We expect a stable gross margin YoY in 4Q14, similar to 3Q14, when its convenience store margin was flat YoY (vs. +45bps YoY in 1H14) from lower sales of high-margin products related to the stamp campaign. Longer term, margin improvement will continue to be supported by a greater focus on high-margin food products, reflecting from its organic gross margin expansion of +20bps/year. The benefit of the business synergy with MAKRO via joint buying will be clearer once the level of sales increases. 

More stores added in 2014 than promised. In 2014, CPALL is likely to open more than its targeted 600 new stores per year. In 9M14, it opened 536 new stores, bringing total stores to 7,965 at end-3Q14. CPALL continues to plan to have 10,000 stores by end-2018.

4Q14 outlook. CPALL’s earnings grew YoY in 3Q14 for the first time since the purchase of MAKRO, aided by no more FX loss after it closed its US$ exposure in Aug 2014. We expect 4Q14 to show a continued rise YoY without the FX loss, better earnings contribution and no more acquisition expenses from MAKRO, together counteracting the negative SSS growth. However, earnings will drop QoQ from seasonality. 

Maintain BUY. We cut 2014 earnings by 11% to Bt10bn and 2015 by 8% to Bt14bn, mainly in response to reducing SSS growth expectations. Our new DCF PT is Bt57 (from Bt58), from both the earnings revision and rolling over PT to end-2015. After the revision, CPALL continues to exhibit the sector’s highest 2-year EPS growth of 37% p.a., backed by a return to SSS growth, better margin, continued store expansion, no more fees from the MAKRO acquisition and upside from faster-than-expected deleveraging. Each Bt10bn repayment of the principal of its LT liabilities of Bt180bn would reduce interest expenses and raise our earnings by 3%. Key risks include changes in SSS growth and margin, execution of store expansion and competition.