Commerce

Commerce

 

The government stimulus programs, revival of farm income, and big sporting events (UEFA Euro and Olympics) in June-August will help boost SSS, supporting further sector re-rating. Our lead picks are GLOBAL, ROBINS, and CPALL: all are looking at strong 2Q16F and valuations are attractive.   

 

Driver#1: Disbursement of government stimulus on course. Beginning in September last year, the government has employed economic stimulus measures worth a total of Bt645bn with an eye to assisting lower income earners and farmers. It began with measures worth Bt434bn in Sep-Dec 2015 (village funds, assistance for SMEs and rubber farmers), followed by Bt212bn in 2016 (assistance for those suffering from the drought and Baan Pracha Rat). Of the total Bt645bn budget, Bt354bn (55%) was disbursed in 4Q15-1Q16, and Bt116bn (18%) will be disbursed in 2Q16-4Q16F, lifting real consumption for the rest of 2016. 

 

Driver#2: Signs of revival of farm income. Improved farm income will be another key to boosting consumption this year. In April, the farm income index turned around to growth of 

 

5% YoY, ending the series of contractions seen since 1Q14. This was backed by growth of 5% YoY in agricultural output prices: prices were higher for major crops (rubber and fruit) and livestock, amid flat production (weaker major crop output outpaced by higher livestock and fishery output). The fall in crop production was caused by the drought. Based on the latest forecast by the Thai Meteorological Department, the impact of El Nino will abate in May-July 2016, and will be followed by La Nina, bringing agricultural production back up in 2H16.  

 

Driver#3: Large global sporting events in June-Aug. The UEFA Euro football cup will run from June 10 to July 10, followed by the Olympics from August 5-21. This generally improves consumer sentiment and spending. Based on data from the University of the Thai Chamber of Commerce (UTCC), spending during the 2012 UEFA Euro and 2010/2014 World Cup was Bt22-26bn, with the largest portion (85%) spent on consumer products and consumables (food & beverages, sports fashion) and the rest on electric appliances and others. News reports suggest retailers of sports fashion (SuperSport, Sports Mall) and electric appliances, such as Power Buy, estimate sales growth of 10-20% YoY during this year’s events. 

 

Sector: Better 2Q16TD and 2016F. The brighter mood, stimulus and low base has lifted sector SSS growth to 3-4% YoY in 2Q16TD (vs. 0.3% in 2Q15 and 1.4% in 1Q16), the highest for the past ten quarters. Figures were positive for all players: mid-single digit growth for HMRPO, ROBINS, CPALL and MAKRO and slightly positive for GLOBAL and BIGC. The improved figures support sector re-rating to 29x 2016PE (still below the 5-year average PE of 32x).  

 

In 2016F, we expect sector SSS growth to surge 2.7% off the 2-year low base (-1.1% in 2014 and -1.2% in 2015) and improved consumption. This, together with higher EBIT margin and more stores will support sector core earnings growth of 16% in 2016F. 

 

Top picks. GLOBAL is our first pick with a new mid-2017 DCF PT of Bt15 (from Bt14 at end-2016), as it is the one poised to report the sector’s best 2Q16F growth (impressive margin expansion from high steel price and better private brand plus positive SSS growth) and has a compelling 2-year PEG of 1.3x (vs. sector’s 1.7x). We also like players who will show robust 2Q16 growth and for whom valuation is attractive: ROBINS (better SSS growth and equity income from stimulus in April and sporting events in June, with 2-year PEG of 1.5x) and CPALL (better convenience store and cash&carry operations from stimulus and sporting events, and lower funding costs, with 2-year PEG of 1.4x).