Home Product Center

Home Product Center Plc (HMPRO) 

 

Investment thesis

We believe HMPRO’s performance has already bottomed out and expect to see many improvements this year. HomePro’s operation has gradually recovered, while Mega Home should continue to deliver robust growth. HMPRO’s valuation is still attractive despite recent increase in share price. It currently trades at PER of 24x FY16 versus its long-term average of 25.2x and remains our top pick in the sector. Our BUY call stands with a YE16 target price of Bt9.

SSS gradually improve

Management told an analysts’ meeting yesterday that the SSS contraction of 1.4% in FY15 was mainly due to weaker upcountry sales (accounting for 60% of total sales). Stores in the provinces posted a SSS contraction of nearly 6% in FY15 due to weak consumption and cannibalization, while Bangkok stores reported decent SSSG of 4.8%. This year, although overall consumption will remain weak, particularly upcountry, the firm has set its SSSG target at 4%, driven by robust growth of Bangkok stores and easing cannibalization at stores in the provinces. Management said the 2M16 SSS grew around 3% and SSSG in Jan was stronger than that in Feb due to impact from the government stimulus package carried over from last year.

Gross margin expansion to boost earnings in 2H16

Last year, gross margin of HomePro stores squeezed 20bps to 26.2% following a lower proportion of private brands from 20.5% in FY14 to 19.1% in FY15. This year, although its house brand portfolio is still undergoing restructuring and will not be fully complete until early next year, the firm expects the proportion will start rising in 2H16, which would push the house brand mix to increase back to 20% in FY16. If everything goes according to the company’s plan, we should see HomePro’s gross margin fatten again in 2H16. However, in our model, we conservatively assume the house brand mix in FY16 to be similar to that in FY15.

Expanding customer base

HMPRO aims to expand its customer base by adding new services and product categories. The firm has increased the level of home renovation service to cover the whole house, not just room renovation as it had before. Moreover, the firm has recently launched a business called “Bike Club” (a full-service bike shop) at its recently-opened store on Chaiyapruk road. In our opinion, we like the increase in the level of renovation service as it should draw more customers and support SSSG in the long run. However, for Bike Club, although the business has high potential to grow from the rising popularity of cycling, it may have to take time to see how it is going.