Home Product Center

New brand to launch into contractor market, boosting long-term growth. FV upped to B19.7 BUY

Home Product Center Plc (HMPRO)

Malaysian branch surely opens in 2014, plus new brand 'Mega Home' focuses on contractors

Apart from HMPRO's plan of aggressive branch expansion of 8-10 branches/year,

there's a progress in investment in Malaysia. In 2014, there would be 2 branches to be

opened in Kuala Lumpur in 1Q14 and 4Q12, believing the company would expand its

branches in Malaysia to 40 branches in a long term. Other than that, HMPRO has

revealed an establishment of a subsidiary to open new modern trades under a new

brand "Mega Home" which would aim at contractors and sell construction material (like

GLOBAL and Thaiwatsadu). Mega Home would be a big branch with the area of 10,000

square meter (compared with HMPRO's normal type of branches that possesses 8,000

square meters of area) and would take B600m/branch. The company would make

openings of these branches in late-2013, beginning with 1-3 branches and aiming to

increase to 4-5 branches in the following years.

New brand penetrates lower market, enlarging customer base and urging long-term growth

At present, HMPRO is focusing on middle-upper customers which are residents who

want direct renovation and decoration, categorized in a different kinds of markets from

the other major competitors GLOBAL and Thaiwatsadu who both focus on the

contractor market. The mentioned market is very interesting because it's large in size,

as most entrepreneurs are traditional trades which are likely to continuously lose the

market sharing to modern trades. Furthermore, GLOBAL and Thaiwatsadu currently

have only 22 and 27 branches respectively which cover only 35 provinces, so there's

plenty of room for HMPRO's branch expansion. In a long term, we believe that there's a

high possibility for the company to use expand Mega Home to neighboring countries

where there's still high demand for fundamental structure development. Nevertheless,

Mega Home is projected not to significantly benefit the company's profit in 2013 and

2014 since it's just at the beginning and still hasn't reached the break-even point.

Accordingly, we maintain our 2013-2014 net profit forecast, but revising up 2015-2017

net profit forecast by 10% to reflect more apparent profit from the new type of

business. Our assumption of Mega Home openings is 3 branches in 2013 and 4

branches in 2014 onward which are close to HMPRO's target. In addition, the

company's long-term profit (CAGR) in 5 years since 2012-2017 would grow notably not

lower than 26% YoY. Lastly, the mentioned forecast still hasn't included the benefits

from branch opening in Malaysia which is only during a test at present.

CAPEX around B10bn/year. Property fund: appealing choice. New FV is B19.7

Due to the plan of aggressive branch expansion from now on, HMPRO's CAPEX during 3

years ahead stands at a high level of B9.6bn/year. For the CAPEX in 2013, it would be

from the internal cash flow (B4bn), the company's cash (B1.2bn) and an issuance of

additional debentures (B4.4bn). For CAPEX in 2014 onward, an issuance of additional

debentures is a possible choice because the interest bearing debt/equity at end-2013 is

projected at only 0.75x, so there's no need for capital raising. However, we prefer

another choice which is the property fund because this would help save the interest

expenses in 2014 by B200m (under an assumption of more loan at around B5bn).

Combined with the book value of B1bn and the extraordinary profit from selling assets

into the property funds which is preliminarily projected to be the area of HomePro

Village in Hua Hin due to 60,000 square meters of selling and hiring area, HMPRO's

extraordinary profit after tax deduction would stand at around B1-2bn or the EPS

increasing by B0.13-0.26, considered additional upside that's still not included in our

forecast. The new fair value, using DCF (9.2% WACC and 4% TV growth) instead of

PER to reflect long-term growth, is B19.7 (before going XD) from B15.6. We reiterate

our recommendation of "BUY" for HMPRO.