Home Product Center

Our top pick in the sector

Home Product Center Plc (HMPRO)

Investment thesis

We maintain our BUY rating on HMPRO and have raised our YE13 target price to Bt18.2 from Bt14.7 to factor in a more aggressive roll out plan and the launch of Mega Home and market entry to Malaysia. We are not concerned about small losses for Mega Home and Malaysian stores during their start-up phases, as the scope for earnings upside from asset spin-offs looks to be larger.

To launch a new brand

As expected, at the analyst meeting yesterday, HMPRO unveiled its launch plan for a new fighting brand called Mega Home, which will cater to the low-cost home improvement segment—the same market positioning as GLOBAL and Thai Watsadu. Mega Home aims to be the center for wholesale and retail construction, improvement, renovation and finishing materials. Its target customers will be small contractors, project owners, retail shops and low-end consumers. HMPRO plans to open three Mega Home stores in 4Q13, and at least 4-5 outlets a year, starting FY14. The time to break-even should be less than three years.

More aggressive expansion plan

HMPRO now targets opening 10 HomePro stores in FY13, more than its previous guidance of eight stores. The aggressive rollout number is likely to be maintained at that level for the next couple of years, so the firm's target of having 80 outlets nationwide may be reached by YE15, sooner than the original plan of YE16. With regard to market entry to Malaysia, the CEO said HMPRO will open its first store in 1Q14 and its second in 4Q14. He expects the outlets to make profits within only one year, thanks to a relatively fat margin in that country. Over the long-term, CEO said there should be scope for at least 40 stores in Malaysia.

CAPEX increases, big earnings upside underway

FY13 CAPEX is set at Bt9.6bn, of which Bt7.6bn will be used for the expansion of HomePro stores in Thailand, the remainder for HomePro stores in Malaysia and for Mega Home. Although HMPRO could finance all the CAPEX with operational cash flows and debt, the firm may spin off Hua Hin Market Village to either a property fund or an REIT in order to maintain its net gearing at a low level. Assuming that HMPRO takes a 33percent stake in the fund, we estimate a net gain of Bt1.6bn from the spin-off (note that we have yet to factor the spin-off in our model).

Earnings projection revisions

We have cut our FY13 profit forecast by 1% to factor in losses during the start-up phases of Mega Home and the planned Malaysian stores, but have upgraded our FY14 projection by 3% to factor in the more aggressive expansion plan. Mega Home and the Malaysian outlets should start contributing profits in FY15, so we have upgraded our FY15-20 earnings forecasts by 7-23%.