Berli Jucker

Berli Jucker Plc 

 

Investment thesis

We now view BJC’s story as the sexiest in the sector. The firm is shaping up to be one of the biggest grocery chains in Asean, and its acquisition of BIGC is just the first step. The next acquisition will be Metro Vietnam, while B’s Mart (its convenience store chain in Vietnam) should be able to deliver better performance in leveraging BIGC’s expertise. We have plugged in BIGC into BJC’s model to better see the latter’s earnings prospects and valuation since the acquisition. We thus raise its YE16 target price to Bt45 and upgrade our rating to BUY from HOLD.

Finance costs may be lower than our model

Management has yet to disclose the finance options, interest costs and leverage target but hinted at an analyst meeting yesterday that the interest costs including hedging fees for bridging loans would be lower than the consensus estimate of 4-5% and probably lower than our model of 3.5%. This should be an even greater sweetener to the deal and confirm our view that the takeover will lead to an EPS accretion. However, at the moment, we conservatively assume the total finance costs of 3.5% in our model.

Substantial benefits from acquisition of BIGC

The benefits from acquisition of BIGC look likely to be greater than we previously thought. Apart from those we had already mentioned (easier to distribute BJC products in BIGC stores, being a key OEM manufacturer for BIGC’s private brands and access to customer information), BJC aims to leverage BIGC’s expertise to improve performance at its other retail chains, such as B’s mart in Vietnam and M-Point Mart (convenience store chain in Laos). Moreover, BIGC’s Pure pharmacies should perfectly integrate BJC’s healthcare business downstream.

Acquisition timelines

If shareholders approve the takeover deal on 21 March, BJC will buy a 58.55% stake in BIGC from the Casino Group by the end of March and the tender offer will take place in Apr-May. BJC’s final percentage holding should be known by the end of May. However, timelines for refinancing bridging loans with long-term debt and a capital increase have yet to be disclosed. We believe that BJC would refinance the bridging loan quickly to lock in the low interest rate for long-term debt and reduce currency risk.

Now plug in BIGC to BJC model

We plug in BIGC to the BJC model based on the following assumptions: 1) the transaction of 58.55% stake in BIGC takes place at end Mar, 2) the tender offer is complete at the end of May, 3) the final stake in BIGC amounts to 80%, 4) the bridging loan rate is 3.5%, including fees and hedging costs, 5) the average interest rate for long-term loans used to refinance the bridging loans at end-Sep is 3.25%, 6) the cash call takes place at end-Sep at Bt30/share and 7) there is net D/E of 2x at YE16.