MC Group Plc

MC Group Plc (MC) 

 

- Upgraded to Outperform. As MC's stock price has retreated by 12.6% since we

published our last report on 15 Aug. 2014, we now perceive the current level as a

great opportunity to accumulate the stock given its robust long-term growth story

and nice dividend yield. While our existing assumptions remain largely intact, we

have rolled over our base year to the end of 2015 and derived a new fair value of

Bt23.0, compared to Bt20.6 earlier. The latest closing price implies interesting PERs

of 17.2x and 14.1x in 2014-15, compared to an EPS CAGR estimate of 19.8% in

2014-16. We therefore upgrade our rating to Outperform from Neutral.

Key investment points

- When opportunity knocks on the door. Having fallen to Bt18.0 at the market

close yesterday, compared to an opening price of Bt20.6 on 15 Aug., the stock

price now offers a potential upside of 27.8% to our new fair value. Furthermore,

we see the implied 2014-15 PERs of 17.2x and 14.1x as undemanding when

compared to our EPS growth expectations of 22.1% and 17.5% in 2015-16. In

terms of peer comparison, the PER ratios appear to be more attractive than the 5-

year historical average of 25.2x in the Commerce sector.

- Earnings recovery assumption maintained. As we stated in our earlier report,

we expect that MC's earnings will bounce back in 2H14, driven by the typical

seasonal sales pattern in the last quarter of the year. The company's track record

shows that last-quarter earnings are statistically higher than those of any other

quarter by a range of 39%-55%. While MC's same-store-sales growth (SSSG) may

stay in a range of -5% to 5% in 2014, we believe that its target annual sales

growth of 20%-25% should be achievable on the back of its planned distribution

channel expansion. At the end of 2Q14, MC's network grew to 656 points of sale

(PoS) from 613 PoS in 2013, while TDC's distribution channels increased to 79 PoS

from 70 PoS in 2013. We assume that MC and TDC will together add 110 new

stores to their domestic networks this year.

- Expected dividend yield of 4.5%-5.9% in 2014-16. In addition to its total

dividend payment of Bt584mn for its 2013 performance, implying a payout ratio of

80%, MC plans to pay a DPS of Bt0.4 for its 1H14 operation. This translates into a

payout ratio of around 84%. With total cash on hand and short-term investments

of Bt1,852mn at the end of 2Q14, we are convinced that MC should be able to

maintain its impressive payout record in 2014-16, thereby lifting our payout ratio

assumption to 70% from 50%. The latest closing price thus reflects a potential

dividend yield of 4.5%-5.9% in 2014-16.

- Upside gain from potential M&A. According to a company statement, MC

expects to complete at least one M&A deal with a potential investment value of

Bt300mn-Bt500mn within 2014. Although MC is still in negotiations with the target

companies, we expect that the transaction, if carried out, will support its growth

plan in the long term and thus provide potential upside to our existing estimates.

Price catalysts

- SSSG pickup, network expansion, lower operating expense from integration of

TDC, and success of M&A deal.