Big C a hot number among brokers

All 13 brokers updating their research papers on Big C stock from July to August are bullish and rec¬ommend "buy", with a target price in the range of Bt60 to Bt71.

The securities houses include Credit Suisse, Merrill Lynch, Bualuang Securities, CIMBGK Securities (Thailand), Asia Plus Securities, Tisco Securities, DBS Vickers Securities, SCB Securities and Phillip Securities (Thailand).

The stock has this year surged by about 23 per cent, outperforming the SET Index, which has slid by about 22 per cent.

Big C is Thailand's secondlargest discountstore chain by number of branches, trailing only Tesco Lotus. It has 60 stores, 25 of which are in Bangkok.

The company plans to open 12 stores this year, five of which were inaugurated in the first half. It will open another four discount stores next year.

Big C posted a net profit of Bt599 million for the second quarter, up 10.3 per cent year on year but down 21.9 per cent quarter on quarter.

Bualuang Securities said in a research note that it was reiterating its "buy" rating for Big C stock with a target price of Bt71, at the top end of the 13 brokers' targets.

The opening of 12 new stores this year represents an expansion rate of 22 per cent by store number and 15 per cent by sales space, compared with 7Eleven's outlet expansion at 11 per cent, the broker said.

It remains upbeat on Big C, as there is plenty of room for the mod¬erntrade retailer to expand further, particularly in the provinces.

"We think the plan to open new stores only in the provinces is a good strategic decision, as upcountry markets are far from being at satu¬ration point and sales stand to ben¬efit from rising farm incomes," Bualuang said.

Given that Big C's merchandise mix is heavily weighted towards necessities and lowerend products, it is a good inflationhedging stock as it can pass though cost increases with only a marginal impact on sales quantity, it added.

Moreover, Big C might reap ben¬efit from the high cost of living, as many shoppers who are more priceconscious are likely to switch from buying necessities at department stores to purchasing them at Big C, the broker said.

Big C has nearly 370,000 square metres of retail space for rent - about half the size of Central Pattana's retail portfolio - and its rental business currently contributes nearly half of the company's earnings before inter¬est and tax.

"But we anticipate that the [rental] portfolio will soon con¬tribute more than the hypermarket operation, driven by rapid rentalspace expansion, rent increases and the high operating leverage associ¬ated with the rental business," the broker said.

It expects Big C's retail space for rent to increase by 27 per cent this year and 12 per cent next year, and the rentalareatototalarea ratio to increase from 2007's 36 per cent to 38.4 per cent this year and 39 per cent next year.

Typically, rents for the company's retail space are adjusted up by about 15 per cent on contract renewal, which takes place every three years - an effective 5percent annual rise. Big C's samestore sales growth, however, edges up by only 1 to 3 per cent a year.

Besides, the rental business offers a higher margin than hypermarket sales.

Big C's management plans to expand the miniBig C conveniencestore network by 50 to 100 stores annually, once the business model is finetuned. That is, after the storeformat improvement programmes are completed, logistics issues are sorted out and the IT system is debugged, all which are expected by yearend. The company currently has five miniBig Cs.

The pharmacyled health and beautystore business under the Pure brand will be another income driver in the future, the company's testing having found that the busi¬ness model is viable, the broker said.

Pure provides a full range of health and beauty products in four main categories: pharmacy, health¬care, beauty and personal care. There are currently three Pure stores.

Bualuang Securities estimates that Big C's 2008 net profit will rise from Bt2.5 billion to Bt3.04 billion this year and to Bt3.61 billion next year.

DBS Vickers Securities also has a "buy" recommendation on the stock, with a target price of Bt63.46. The brokerage points to Big C's aggres¬sive expansion plan.

"The government is reviewing the draft retail and wholesale business law to decide whether it is necessary for the country. The temporarily shelved legislation could make the expansion of modern trade stores more difficult in the medium to longterm. But we still believe the current government is less likely to imple¬ment the act," the broker added.