Big C Supercenter

Big C Supercenter Plc (BIGC)

 

Below our estimate

BIGC reported 4Q15 net profit of Bt2.1bn, representing a 15% YoY slide but seasonally up 59% QoQ. The figure was 7% below the street and 15% lower than our estimate due to slimmer-than-expected gross margin.

Results highlights

Sales dipped 3% YoY to Bt30.8bn in 4Q15, while same-store sales declined 4.8% YoY, due mainly to weaker non-food sales. 

Gross margin greatly disappointed. It was squeezed to only 13.9% in 4Q15 from 16.9% in 4Q14, due to a change in the product sales mix (lower sales of high-margin, non-food products) and intense competition. It seems that the company’s new pricing and promotional strategy (discontinuing discount coupons for whole baskets and offering discounts only on selected items) failed to bear fruit under current conditions. This squeeze in GM also outweighed any benefit from BIGC’s cost-optimization programs, which effectively reduced SG&A-expenses-to-sales ratio by 15bps YoY during the quarter. As such, EBIT margin declined 132bps YoY to 9.1%.

Outlook

Weak sales momentum is likely to continue into 1Q16, while gross margin would remain under pressure from a change in the sales mix and competition. However, we estimate impact from cost-optimization program and de-gearing should underpin YoY growth of the bottom line. Note that BIGC repaid loans of Bt10bn during 4Q15, which would cause interest expenses in 1Q16 to decline by 56% to only Bt83m.

What’s changed?

We cut our FY16 earnings estimate 6% to reflect weaker gross margin trend and reduced our YE16 target price to Bt204 from Bt214.

Recommendation

We think BIGC is currently overvalued. The only 1.6% upside to the tender offer price (an annualized return of 6.2% if the tender offer takes place in mid-May) may mean the stock is not worth holding unless by fixed-income investors. We thus downgrade our rating on BIGC to SELL from HOLD.