SIAM MAKRO

Revise up forecast and FV to B555. Upgraded to "BUY"

SIAM MAKRO Plc (MAKRO)

Q4 2012 profit prominent, rising 72% YoY due to increased profitability

MAKRO's 4Q12 profit has hit the year's record high, growing better than expected to

B1,163m or 53% QoQ increase due to seasonal benefits and 72% YoY increase

because the company's 4Q11 profit was low as a result of the flood crisis and damage

recognized by B238m. However, if only considering the norm profit, it is still notable

with 34% YoY increase although sales have risen only by 12% YoY because of 5 new

branch openings in 2012 and the same-store sales that are projected to increase less

than the previous quarter's average of 8% to only 3-4% compared with high volume

of sales in 4Q11 as a result of hoarding. Nevertheless, the profitability has improved

apparently, as the norm margin has increased from 3.2% in 4Q11 to 3.8% due

partially to other kinds of revenue and the revenue from suppliers' selling promotion

that has increased by 34% YoY. Moreover, the gross margin has increased from 8.6%

in 4Q11 to 9.1percent from effectively promoting high-margin products like fresh food (its

margin is higher than dry food's by 3%). In addition, MAKRO has benefited from the

corporate tax rate that has been cut to 23%, helping compensate the increased

selling and administrative expenses. Accordingly, MAKRO's FY2012 profit stands at

B3,556m or an outstanding increase of 37% YoY, higher than our forecast by 5%.

Revise up 2013 and 2014 forecasts by 7% and 8%, but 1Q13 not so notable

With the profit higher than projected as a result of increased profitability, we believe

that MAKRO would thrive continuously this year. This reflects from the domestic

consumption that is still vigorous and the tourism that is still bright, benefiting

entrepreneurs of hotels, restaurants, and catering (HoReCa). This group of

businesses has high growth of 20%/year which is higher than total sales. Also, the

margin is higher than other groups of ordinary customers due to an aim on fresh food

products (margin is higher than other normal products by 3%). According the

reasons above, we're convinced that the gross margin is likely to increase constantly

and we revise up our gross margin assumption from 8.1% to 8.65% (8.4% in 2012),

thus 2013 and 2014 profit forecasts increase by 7% and 8% respectively (described

on the following page). Under the new forecast, the company's 2013 profit is

projected to rise by 25% YoY, growing continuously by 21% in 2014. Other than that,

if the management has a plan to expand more branches than assigned at 3

branches/year, it would be considered as additional upside that isn't included in our

forecast. However, the profit in 1Q13 is preliminarily projected to not be so

outstanding at only 13-18% compared with one of 1Q12 when there were still no

effects from the policy of increased minimum wage and the company still has

benefited from the cut of corporate tax rate to 23%. Accordingly, in the management

has noted that the company's expense would increase 1Q13 by B100m from 1Q12.

New FV is B555… upgrade from "HOLD" to "BUY"

Since the beginning of 2012, the share price still has remained laggard, rising only by

2% compared with the retail sale sector's index that has increased by 11%.

Moreover, the company's growth is still quite remarkable and the financial status is

still solid. The new fair value, using PER at 30x from 28x (close to the sector's

average), stands at B555 (from B483) with 22% upside. We upgrade our

recommendation from "HOLD" to "BUY" for MAKRO. In addition, the company has

announced to pay dividend yield at B7.25/share or 1.5% (or B12.5 in FY2012), going

XD on 14 March 2013.