Commerce

Weak consumption indicators suggest Commerce sector will continue to contract slightly in 

2Q15, but Commerce will still be better than 1Q15 off last year’s low base from the May-June curfew. Despite weak Commerce, store and margin expansion will underwrite sector 2Q15 earnings to grow YoY, as they did in 1Q15. Sentiment should brighten in 2H15 as the government spends more and agricultural prices stabilize. Top picks are CPALL (best growth) and GLOBAL (sector laggard but growing) 

 

1Q15 recap. Core earnings improved, rising 22% YoY, with store and margin expansion overcoming the weak Commerce growth. Commerce contracted for the sixth quarter in a row at -1.0% in 1Q15 (vs. -0.4% in 1Q14 and -0.5% in 4Q14). Store numbers expanded by 9% YoY. Sector EBIT margin was 7.7%, +50bps YoY. CPALL had the best core earnings growth (+36% YoY) from no more fees from the MAKRO deal plus better convenience store and cash and carry earnings; HMPRO had the sector’s lowest core profit (+1% YoY) from negative Commerce and narrower margin.  

 

Lackluster Commerce from unchanged consumption indicators 2Q15TD. In April 2015, the Private Consumption Index was stable YoY. In May, the Consumer Confidence Index fell to 75.6 from 76.6 in April, an 11-month low, reflecting concerns on the economy. In April-May 2015, the Farm Income Index fell 15% YoY, hit by lower agricultural prices (-9% YoY) mainly rubber  (-20% YoY), and agricultural production (-6% YoY). Government investment budget disbursement sped up to Bt30bn/month in Mar-May 2015 (vs Bt16bn/month in Oct 2014-Feb 2015), but disbursement only reached 39% of the budget in 8MFY15 (Oct 14-May 15) vs 44% in 8MFY14. We expect sector Commerce to continue to contract slightly as consumption indicators continue poor, but still should improve over 1Q15 off last year’s low base (the curfew in May-June closed stores early). In 2Q15TD, GLOBAL had best Commerce (+2-3% YoY), followed by CPALL. BIGC was flat, with others showing contractions. Countering the weak Commerce, store and margin expansion will underwrite sectoral YoY earnings growth in 2Q15, as they did in 1Q15.  

 

2H15 better. We expect healthier broad-based demand and the absence of other company-specific factors to lead to improvement in sector Commerce in 2H15. Consumption sentiment will pick up in tandem with budget disbursement as the government works to meet its targeted 80+% in FY2015F and as agricultural prices (notably rubber price) become more stable late this year. Other factors that hit sector Commerce last year – the unpopular stamp campaign for CPALL (2H14), cannibalization for GLOBAL (3Q14) and ROBINS (2H14) – will not be repeated and Commerce will thus be able to overcome this year’s negative factors – a change of tourist profile for ROBINS and cannibalization for HMPRO and MAKRO until 4Q15. In 2015, we estimate sector Commerce growth at 1.4% (vs -1.1% in 2014). This, together with expansion (+10%) and better EBIT margin (+30bps), will underwrite sector core EPS growth of 20% in 2015 (from -2% in 2014).  

 

Top picks: CPALL and GLOBAL. CPALL is our top pick: 1) it is poised to report the sector’s best earnings growth for the rest of 2015F from better convenience store profit (Commerce revival in the hot season, better stamp campaign and margin expansion) and cash and carry operations (rapid expansion and margin enhancement) and lower all-in funding costs; 2) it has earnings upside from the sale of a portion of its holding in MAKRO. GLOBAL is our second pick: 1) it has lagged the sector (-22% against -11% for the sector), after the poorest showing in the sector for over year; 2) its earnings will improve YoY from 2Q15F, backed by better Commerce growth (fading cannibalization and the reopening of its Surin store), energetic expansion, higher gross margin from better management of its private label, and no repeat of the steel inventory loss recorded in 1Q15.