Siam Global House

Siam Global House Plc (GLOBAL)

Upgrade to OP on robust earnings outlook
We upgrade GLOBAL to Outperform from Neutral with a new target price of Bt16.50, up from Bt13.50, in accordance with our positive earnings revisions for 2016-18E of 9.7-22.2%. The revisions reflect a higher-than-expected average gross margin outlook due mainly to a higher contribution from imported products and better cost management. Moreover, improving consumption upcountry and the effects of the government’s stimulus measures should boost GLOBAL’s growth outlook. We forecast GLOBAL’s 2Q16 net profit at Bt344mn, a rise of 30.6% YoY but down 23.9% QoQ, while its SSSG looks likely to be slightly negative due to a drop in traffic in May-June, as the rainy season arrived earlier than last year. We expect 1H16 net profit will account for 57.2% of our full-year forecast.
Investment highlights
- 2016-18E earnings revised up. We raise our 2016-18E earning forecasts by 22.2%, 9.7% and 11.0% to reflect better-than-expected average gross margins, thanks to higher contributions from imported product sales (about 12.3% in 2015) and increased cost efficiency due to improved inventory management. Our forecasts for revenue growth are unchanged at 12.8%, 16.8% and 15.4% to Bt19bn, Bt22.2bn and Bt25.6bn, respectively. We therefore expect 2016-18 net profit to grow by 57.9%, 11.4% and 17.2%, or at a three-year CAGR of 27.3%. 
- High GPM from imported products to be key driver. From discussions with management, we infer that the high blended gross margin seen in 1Q16 will continue in 2Q16 and beyond despite less benefit from the rising steel price, thanks to a higher contribution from private label products and better bargaining power over GLOBAL’s suppliers. As such, we revise up our GPM assumptions by 79bps in 2016 and 95 bps in 2017-18E to 18.8%, 19% and 19%, respectively.  
- Bottoming out of consumption in provinces to support growth outlook. Positive growth in farm incomes in April-May and the end of the drought should boost consumption in the agriculture-related sector, mostly in the provinces. Moreover, the stimulus measures rolled out by the government for farmers in June should support overall consumption upcountry during the low season in 3Q16, while the beginning of the harvest season in 4Q16 will continue to boost purchasing power over the following quarters. GLOBAL should benefit from this trend.
- Solid 2Q16 earnings. We expect GLOBAL’s earnings to grow strongly to Bt344mn, up 30.6% YoY but down 24.4% QoQ. The nice YoY increase is based on an impressive gross margin contribution from GLOBAL’s private brand sales, product mix and improving cost efficiency. However, seasonal effects are expected to result in the QoQ drop. During 2Q16, GLOBAL launched two new stores, taking its network to 40 outlets at end-2Q16. SSSG is likely to be slightly negative at -1-2% due to a drop in traffic in May-June as the rainy season arrived earlier than last year. If we are correct, 1H16 net profit will come in at 57.2% of our full-year forecast.
Valuation
- We upgrade our rating on GLOBAL to Outperform from Neutral with a new target price of Bt16.50, up from Bt13.50, reflecting our upward earnings revision. The stock is trading at 38x of 2016EPS, in line with its historical mean. Note that 2Q16 results should be released on Aug. 9, 2016. 
Highest earnings growth in the Retail sector 

 

Private imported products the key driver

 

2016-18E earnings revised up by 9.7-22.2%. 

 

We raise our 2016-18E earnings forecasts by 22.2%, 9.7% and 11.0%, respectively to reflect a better-than-expected average gross margin on higher contributions from imported product sales (12.3% in 2015 and 13% in 1Q16), and increased cost efficiency due to improved inventory management. Our revenue growth forecasts are unchanged at 12.8%, 16.8% and 15.4% to Bt19bn, Bt22.2bn and Bt25.6bn, respectively. From discussions with management, we infer that the high blended gross margin seen in 1Q16 will continue in 2Q16 and beyond despite less benefit from the rising steel price, thanks to a higher contribution from private label products and better bargaining power over GLOBAL’s suppliers. As such, we revise up our GPM assumptions by 79bps in 2016 and 95 bps in 2017-18E to 18.8%, 19% and 19% respectively. We therefore expect 2016-18 net profit to grow by 57.9%, 11.4% and 17.2% respectively, or at a three-year CAGR of 27.3%.
Bottoming out of consumption in provinces to support growth outlook 

 

Positive growth in farm incomes in April-May and the end of the drought should boost consumption in the agriculture-related sector, mostly in the provinces. Moreover, the stimulus measures rolled out by the government for farmers in June should support overall consumption upcountry during the low season in 3Q16, while the beginning of the harvest season in 4Q16 will continue to boost purchasing power over the following quarters. As all of GLOBAL’s stores are located upcountry and the majority are in agriculture-based provinces, the company should be one of the beneficiaries of this recovery trend.
Nice growth in 2Q16 earnings at 30.6% YoY 

 

We expect GLOBAL’s 2Q16 earnings to grow strongly to Bt344mn, up 30.6% YoY but down 24.4% QoQ. The nice YoY increase is based on an impressive gross margin contribution from GLOBAL’s private brand sales (13–14% in 2Q16), a smaller contribution from low-margin products (i.e., construction materials) and improved cost efficiency, However, seasonal effects are expected to result in the QoQ drop. We forecast 2Q16 revenue at Bt4.7bn, up 5.1% YoY but down 9.6% QoQ, despite the opening of six new stores in the past 12 months. We forecast negative SSSG in 2Q16 due to softer sales in May-June as the rainy season arrived sooner than last year. We expect gross margin in 2Q16 should soften from 1Q16
due to an absence of a reverse of inventory loss from the rising steel price, but it should stay at a high level of 19.0%, while SG&A to sales is expected to rise to 12.9% from 12.1% in 2Q15 and 11.3% in 1Q16 due to 2 new store openings during the quarter. We expect 1H16 net profit will account for 57.2% of our full-year forecast. Note that 2Q16 results should be released on Aug. 9, 2016.
Upgrade rating to Outperform with a new target price of Bt16.5

 

We upgrade our rating on GLOBAL to Outperform from Neutral with a new target price of Bt16.50, up from Bt13.50, based on a DCF valuation with a discount rate of 6.9% following our upward earnings revision. Our new TP implies 43.5x 2016EPS and 40.9x 2017EPS, or about 0.3SD above GLOBAL’s seven-year historical mean. The stock is trading at 38x 2016EPS, in line with its historical mean, and offers 13.8% upside to our new TP.