We are now more bullish on BIGC’s outlook after attending its analyst meeting last week. Although weak consumption and political turmoil remain headwinds to its 1H14 performance, we believe the share price could outperform many of the retailers under our coverage, as BIGC is one of only a few that have scope for earnings forecast upgrades (mainly tied to margin expansion). Moreover, we see long-term potential for Cdiscount, which would make for some major upside. Although we have cut our FY14 earnings forecast 3% and trimmed our YE14 target price to Bt204 from Bt210 on a slower expansion outlook, our BUY rating stands.
Sustainable margin plus upside from new DC
Management said the substantial margin expansion was driven by new supplier rebates and cost optimizing programs that were implemented since early 2013. Management believes that GM (on a full-year basis) will prove sustainable and guides for stable EBITDA margin. There could be upside to margin, as the firm has yet to factor in a better operating margin after a new DC for Mini BigC starts running in 2Q14.
New private label strategy should boost margin further
Unlike other retailers, BIGC found it difficult to expand margin by increasing the proportion of private labels in its merchandizing mix, as a hypermarket has to maintain a wide range of basic necessity products, while Thai consumers tend to be brand-loyal to consumer products and often regard house brands as being of low quality. But now we see light at the end of the tunnel—the firm has changed its private label strategy by introducing new brands rather using store (BigC) brands, while products branded BigC have been re-launched with new signage and packaging designs in order to instill a sense of improved product quality among shoppers.
Temporary slowdown in expansion
Given weak prevailing domestic consumption and political turmoil, BIGC has moved conservatively on expansion. The firm currently plans to open four hypermarkets, eight BigC Markets, 40 Mini BigCs and 20 Pure outlets in FY14. It also targets adding Jumbo Stations in two existing hypermarkets and converting two hypermarkets into Jumbo formats (cash&carry wholesalers). This plan would require CAPEX of Bt5-6bn in FY14, down from Bt7.2bn in FY13. However, if the economic outlook were to improve, the firm would resume aggressive expansion mode.
Cdiscount online retailer is a good-looking business model
We like Cdiscount for its business model, clear market target and the huge potential of 155m consumers in Thailand and Vietnam. The website will offer only special deals on a variety of products with aggressive pricing. Those deals should attract online shoppers and make Cdiscount a leading online store in Thailand and Vietnam (as it is in France). The cost should be competitive, as the venture will be able to leverage off the bargaining power of BIGC and of Casino's operation in Vietnam.