Robust SSS growth. MAKRO updated that its SSS growth was 7.5% YoY in 1Q14, vs 7.5% in 1Q13 and 8.6% in 4Q13. This was attributable to strong SSS growth from dry food (+6.2% YoY) and fresh food (+17.0% YoY) outpacing a slight drop in non-food products (-2.2% YoY). Of total sales, 64% came from dry food, 25% from fresh food, and 11% from non-food products. In April, its SSS growth declined slightly from 1Q14 to be in the range of 6-7%. We note that its SSS growth YTD was relatively in-line with our assumptions at 6% in 2014F.
Margin improvement. MAKRO updates that the gross margin improvement (+40bps YoY) in 1Q14 was backed by its organic improvement. Sales from its high-margin HoReCa segment picked up by 17% YoY, raising the sales contribution from HoReCa to sales at 22.8% (+80bps YoY). Focus on the HORECA segment means it assigns more floor space to fresh food and non-food products, for which margins are 1.5-2.5x above dry food products. In the meantime, Business synergy with CPALL, if any, via joint buying, product cross-selling, and logistics, should be seen for the rest of the year.
Committed for at least 6 new stores in 2014F. In 2013, MAKRO opened seven new stores: five cash & carry stores (~7000 sqm/store) and two food service stores (~2000 sqm/store). In 2014, it committed to open at least six new stores: four will be cash & carry and two food service stores. It has opened 2 stores (Ko Pha Ngan and Bueng Kan) in 1Q14A and will open 2 stores (North Pattaya and Mae Sai) in 2Q14 and another 2 stores (Salaya and Phattalung) in 3Q14. Meanwhile, MAKRO just obtained the licenses for more new stores ready to open in late 2014 but it has not yet committed, pending on the progress on construction which will take time about 6 months.
Upside risks for store expansion. Its high CAPEX budget of Bt8bn (vs. our forecast at Bt5.5bn for 7 new stores) implies that it is looking for aggressive expansion this year (likely in the high range of CPALL’s target for MAKRO expansion at 7-11 stores/year). If this is the case, it will be upside risks towards our estimate.
Maintain BUY; DCF PT at Bt35. MAKRO’s SSS growth outperformed the sector for five quarters in a row (+7.8% in 2013A vs sector’s at 3.6%, and +7.5% in 1Q14A vs sector’s at -0.4%). We like its resilient SSS growth despite the consumption slowdown, plus continued margin and store expansion. CPALL has no intention of delisting MAKRO, but the small free float means the stock is most likely going to be very illiquid. Key risks are changes in SSS growth, store expansion, and business synergies related to the acquisition.