Siam Makro

Siam Makro Plc

 

MAKRO has been the sector’s greatest laggard for the past six months (-13% vs. the sector’s +13%), as the market prices in its weak 1Q16, with margin contracting from 1Q15’s high base. However, we believe 1Q16 was the year’s low point, with momentum building over the rest of the year with SSS growth, aggressive expansion, and stable/better gross margin. Maintain BUY with a new mid-2017 DCF PT of Bt43 (from Bt48 at end-2016), from earnings revision and rolling over PT.  

 

Stronger SSS in April. In 1Q16, SSS growth was +0.3% YoY, backed by stronger fresh food SSS (31% of sales) of +12% YoY, outstripping weaker dry food SSS (59% of sales) of -4% YoY and non-food SSS (10% of sales) of -2% YoY. In 2Q16TD, SSS growth has risen to the mid-single digits (vs. +0.3% in 1Q16 and -0.9% in 2Q15), after it moved to greater price competition in order to build volume. Its SSS growth is now positive in all segments and in Bangkok as well as upcountry.  

 

Aggressive local expansion. MAKRO added a record 16 new stores in 2015 (9 cash & carry, 4 food service, 3 food and frozen food shops), giving it 98 stores at end 2015. In 2016, it targets even more expansion, adding over 20 new stores (8 cash&carry, 4 food service and more than 10 food and frozen food shops), with 2016 CAPEX at Bt6-7bn. In 1Q16, MAKRO opened four new stores (two cash&carry and two food service). It will open two new stores in 2Q16 (two cash&carry) and at least two new stores in 3Q16 (cash&carry and food service). It has obtained the construction licenses for another three new stores (two cash&carry and one food service).  

 

Expansion overseas. After studying investment opportunities in AEC plus India, Russia, and China, MAKRO is in the process of negotiating with JV partners in several countries. Progress in the selection of JVs will be known in the next 1-2 quarters. 

 

Gross margin to be better. Gross margin narrowed by 100 bps YoY in 1Q16, mainly off last year’s high base brought by a change in accounting treatment, the reversal of provision expenses for chilled foods, and lower promotional support from fewer new stores opened in the period. Excluding these items, 1Q16 gross margin actually rose 20bps YoY from more sales contribution from the high-margin HoReCa segment (+17% YoY) which led to greater contribution of HoReCa to sales to 25.7% (+210bps YoY). MAKRO expects gross margin to be stable YoY in 2Q16, since there were no extra items on margin in 2Q15, plus better high-margin HoReCa sales, offsetting price reductions.  

 

SG&A/sales to stay high. Its SG&A/sales rose 20bps to 7.1% in 1Q16. This will stay high because of the higher expenses brought by its rapid expansion, new IT system, and more depreciation from its new head office building in May. 

 

Cut earnings. We revised our forecast down 10% in 2016-17F, incorporating lower gross margin and high SG&A/sales. This shows that 1Q16 was this year’s poorest (margin dip from 1Q15’s high base). We expect better earnings in 2Q16-4Q16, with stronger SSS growth, more expansion, and better or at least stable margin. Key risks are illiquidity from small free float, change in SSS growth and expansion.