Siam Makro

Siam Makro Plc (MAKRO)

Investment thesis
We like MAKRO for its initiative, effective strategy, superior operational efficiency, market leadership, strong growth profile and because it has the highest dividend yield and the cheapest valuation in the sector. We don’t think the unclear long-term expansion plan is a big issue, as its growth is driven largely by the existing operation. We expect MAKRO to deliver stronger growth than the consensus estimate, so upgrade flows are likely to continue. Our BUY rating stands with a YE13 target price of Bt550.
Drawbacks
Unlike other retailers, MAKRO has never provided guidance for its long-term expansion plan, so the consensus (including us) conservatively assumes the number of new stores at around 3-4 per year. That translates into an expansion rate of only 6-7% in terms of sales space. Moreover, the street may be concerned about MAKRO’s long-term expansion plan, as it might be curbed by planned city zoning laws that would prohibit the construction of commercial buildings larger than 2,000sq.m in some areas. But management recently told us that MAKRO expects to eventually have 100 stores nationwide, almost double the number it has today.
Comparable profit growth
Despite an unexciting top-line growth profile, MAKRO should deliver a 3-year EPS CAGR of 21% (FY13-15), in line with the peer average, thanks to hefty margin expansion brought about by a product mix migration favoring high-margin HoReCa products. Moreover, we see great scope for the firm to build the proportion of HoReCa items in the sales mix further. HoReCa sales have posted a CAGR of 23% over past five years and comprised 20.7% of FY12 sales (see Figure 4). We expect this percentage to rise to above 30% within the next six years, driven by the introduction of new products and store transformations to HoReCa-oriented formats in which HoReCa items make up more than 30% of the merchandise mix.
More high-value-added products in stores
Margin expansion is not only driven by a rising proportion of HoReCa products in the sales mix, but by the ongoing addition of high-value-added products and services such as ready-to-cook food, imported food, products for niche markets, professional cooking equipment and coffee solutions. We expect to see more high-value-added products on shelves, given that the firm has recently hired more food specialists (mainly expatriates) to help build its food service business.
Superior operational efficiency
MAKRO’s efficiency is much greater than the market perceives. During the past three years, its sales and profit per square meter increased at CAGRs of 6% and 23%, respectively, which were the fastest rates of improvement in Thai retail space. MAKRO now ranks second in the sector (just behind CPALL) and first among large-format retailers (see Figure 7-8) for sales and profit per square meter.