FRIDAY, March 29, 2024
nationthailand

Big C Supercenter

Big C Supercenter

Switch to BJC advisable SELL

Big C Supercenter Plc (BIGC) 
 
Investment thesis
We assess BIGC as not worth holding. There is an only 2% upside to its tender offer price, while the stock currently trades at a FY16 PER of 27.5x, higher than BJC’s 22.9x. Moreover, the benefit of becoming a member of the TCC group looks negligible, while BJC is likely to gain the most from its impending acquisition of BIGC. We recommend switching to BJC.
Slight improvement but remains weak
Management said that spending upcountry had begun to stabilize. BIGC’s SSS returned to growth of 0.8% in Jan from -4.8% in 4Q15. The retailer expects SSSG to be in the range of 0-1% for this year. Gross margin would remain challenging as competition continues to intensify while sales of non-food, which carries the highest gross margin, remain weak. However, BIGC targets EBITDA margin to improve back to its FY14 level of 11.4% (versus 10.8% in FY15), fueled by improving productivity and efficiency. 
Rental income continues to lead growth
BIGC targets to roll out six hypermarkets, three BigC Market and 75 Mini BigC outlets this year, compared to the two hypermarkets, 18 BigC Markets and 67 Mini BigC it opened last year. It seems that BIGC is expanding more aggressively, but sales space is expected to rise only 2.6% in FY16 versus 2.2% in FY15, given that the new hypermarkets will be of the retailer’s smallest format, with sales space of only 4,000-5,000sqm per store. Rental space, however, is expected to grow faster. Apart from new stores, the extension of rental area at existing stores as well as reallocating sales floor to rental space should drive the total rental area to expand 11% in FY16.
REIT now put on hold
Due to the looming change in major shareholder, the plan to spin off assets to a REIT has now been put on hold. However, this option may be back on the table if BJC wants to improve the balance sheet and reduce the dilution effect from a cash call.
Small synergy benefit to BIGC; BJC gains the most
Management said synergy benefits with BJC would come in the form of logistics, house brands and land banks. TCC may help BIGC to expand easier given that it is one of the biggest landlords in Thailand. However, in our view, benefit to BIGC should be small while most of the benefit will go to BJC. First, BIGC will be a powerful distribution channel for BJC. Second, BJC will be a major OEM manufacturer for BIGC’s house brands (7% of BIGC sales). Third (the most important), in its takeover BJC will retrieve market data, including customer behavior, demand preferences and competitor data, from BIGC.
 
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