Siam Makro

Siam Makro Plc (MAKRO) 

 

Investment thesis

We have revised down our FY16 earnings estimate by 8% and cut our YE16 target price to Bt38.75 from Bt42 as we expect sales to remain soft while its SG&A-to-sales ratio will continue at peak level for another year. At present, we expect MAKRO’s EPS growth to be only 12.8% in FY16, versus the consensus’ figure of 19.2%. With this slow growth profile, we think the current PER of 27.8x FY16 is fully valued. We thus downgrade our rating to HOLD from BUY. 

If our earnings estimate on MAKRO is right, CPALL may be unable to sell some of its MAKRO shares this year as MAKRO’s share price may fail to rise above CPALL’s total costs. As such, any catalysts for an upgrade to CPALL’s earnings look to have disappeared from the 2016 calendar.

Heads up on weak 4Q15 performance

The 4Q15 should be a soft quarter. We estimate 4Q15 profit of Bt1.5bn, up 2% YoY. SSS is expected to decline around 3%, while the top line should rise only 6% YoY to Bt39.8bn in 4Q15. Three major reasons behind the soft sales are the operational hiccup from installing an Enterprise Resource Planning (ERP) software system in October, the cannibalization effect and falling dry food sales (accounting for 60% of total sales) following weak domestic consumption. A fatter gross margin looks to be the only positive for the quarter thanks to the change in the sales mix given that high-margin food sales remained strong while sales of low-margin dry food declined.

Rising SG&A expenses should continue to be the headwind to profit growth in the short-to-medium term. Apart from higher OPEX from aggressive store expansion, operating expenses from the new HQ building (opening in 2Q16) would push up SG&A expenses by almost Bt100m a year.

May review development plan

Management passed on that the firm may review the number of new stores to be rolled out in the long term as online (including sales through call centers) and direct sales businesses have grown quickly and are eating into MAKRO’s market share. The firm has lost some customers to specialty suppliers who have approached MAKRO customers once those customers had become bigger and had sufficiently high volume of orders. These suppliers offer better deals, such as delivery services, credit terms and sometimes lower prices. MAKRO is thus considering establishing a unit that will handle these big-ticket customers and offer delivery services. This effort to maintain market share, however, will come with additional costs.

Overseas expansion is likely to kick off soon

MAKRO will soon resume its plan to debut stores in Myanmar as it is likely that general policy for foreign investment will remain unchanged under the new government. The first store may be seen within this year. In our view, although overseas expansion will extend MAKRO’s growth story in the long term, it will be a headwind to profit growth in the short-to-medium term as its overseas unit is expected to generate losses for at least 3-5 years.