Siam Makro

Siam Makro Plc (MAKRO) 

 

Investment thesis

We joined the opening ceremony at MAKRO’s Nakhon-In branch yesterday. Overall, we are impressed by MAKRO’s product developments, which not only help the firm to meet the demand preferences of HoReCa customers but should also motivate new demand and make it the trend-setter for the HoReCa industry. However, we foresee negative sentiment toward the share price in the short term as its 2Q15 earnings growth will be slow and should be lower than our preliminarily estimate given that SSSG and gross margin tend to be lower than our model, while SG&A expenses would rise faster than we assumed. Coupled with the lack of upside to our YE15 target price of Bt41, our HOLD rating stands.

Nakhon-In store

The store is the seventh under the 7,000sqm “Eco Plus” format, the hybrid to serve both mom & pop shops (60%) and HoReCa customers (40%). Note that MAKRO divides its stores into four formats, based on the percentage of HoReCa products; Classic (20%), Eco Plus (40%), Food Service (80%) and Frozen food shop (almost 100%). This Eco Plus store has products of around 11,500SKUs, of which 22% is fresh food, 58% is dry food and the remainder comprises non-food items.

Product development is key success to tap HoReCa customers

After surveying the products on the shelves during our store visit, we are impressed with MAKRO’s product development. Every time we visit the stores, we often find new items, particularly ready-to-cook food and niche products. The ready-to-cook products will be an added convenience for chefs and restaurant owners as they substantially reduce food-preparation time and cut labor costs. Moreover, MAKRO offers niche products for each type of restaurant, such as selections of marinated meats, various kinds of sauces for BBQ restaurants and special rice that is ideal for cooking fried rice or chicken rice. We believe these product developments will enhance MAKRO’s competitiveness to put the company in a position that no rival can match.

Earnings growth will be slow in the short term

Management said that SSS in April-May contracted around 1-2% due to the two-week closure of its store in Lamphun (as the result of damage from a thunderstorm), weaker sales at stores in the south (stemming from less consumer spending power amid falling rubber prices) and cannibalization (in Roi Et and Phuket). SSS is expected to improve in June but may not be strong enough to push 2Q15 SSS to a growth. Gross margin should expand around 100bps to 9.3% in 2Q15, but it will still be slimmer than our previous estimate of 9.7%. SG&A expenses should increase faster than our model due to business development costs (for expansion to Myanmar). If June sales maintain their momentum from April-May, MAKRO should post a 2Q15 net profit of Bt1.15bn, up 9% YoY.