Berli Jucker

Berli Jucker Plc (BJC)

 

Investment thesis

We still think it is not a good time to load BJC into portfolios. There is substantial downside risk to our EPS forecast, as we have yet to factor the acquisition of Metro into our model. Assuming that a cash call takes place by March 2015, the dilution and interest expenses on new loans would drag down our FY15-16 EPS forecasts by 66% and 61%, respectively. Our EPS forecasts would be even lower if we were to take Metro’s loss into our model. We have a SELL rating on the stock.

Gradually recovering, but still soft

BJC expects its performance to improve in 2H14. Demand for glass packaging has gradually recovered, while pressure from margin squeeze in the Consumer Supply Chain has eased since the prices of major raw materials declined. The Healthcare Supply Chain should also deliver a stronger HoH performance, thanks to resumed government spending. However, the improvement won’t be strong, as domestic consumption remains weak. The company may have to spend on marketing activities to draw demand, as it did in 2Q14.

Recapitalization plan update

The CEO is confident that a Bt16bn cash call through the offering new shares to existing shareholders at a ratio of 9:2 at a price of Bt45 apiece will be successful, thanks to strong support from TCC (a 73.7% stake in BJC). He said that the timing of the recapitalization is flexible. It may take place shortly after an EGM on Oct 13 or be postponed until the acquisition of Metro is completed. If BJC were to opt to make the cash call right after the EGM, it would use the new capital to repay existing loans and then borrow again after the takeover of Metro was completed. But if the firm were to increase capital after the deal is done (the most likely scenario, as there may be debt prepayment penalties), a bridging facility would be needed. For the remaining Bt12bn to finance the acquisition, BJC would go with either long-term loans or convertible bonds.

Metro turnaround in FY17 at the earliest

Management aims to enhance Metro’s profitability by negotiating with suppliers for better commercial trade terms and by cutting costs by reducing the number of expatriates and unnecessary management fees. The firm expects Metro Vietnam to turn around into black ink in FY17. However, we expect a longer time-frame, as there is risk that supplier negotiations may not be successful, given Metro’s small size, which limits its bargaining power. Although Metro has a 22% market share of modern-trade retail, it has only a 0.9% share of Vietnam’s grocery market. 

Moreover, cost-cutting may not go as expected, as BJC still needs support from Metro AG to run the wholesale chain under a Transitional Services Agreement (BJC has no experience operating a large store format).