Regional Industry Focus
ASEAN Grocery Retail
Refer to important disclosures at the end of this report
DBS Group Research . Equity 17 Apr 2018
Shop with a top-down approach STI : 3,497.19 KLCI : 1,878.76 SET : 1,767.17 JCI : 6,286.75 December quarter earnings ended mixed as Thailand PCOMP : 7,870.25 and Singapore outperformed Indonesia and Philippines Analyst Alfie YEO +65 6682 3717 Positive on Singapore and Thailand’s modern grocery [email protected] retailers based on country fundamentals Andy SIM, CFA +65 6682 3718 Adopt top-down stock-pick strategy on markets with [email protected] firm fundamentals CHEAH King Yoong +60 32604 3908 Sector top picks are SSG, DFI, BJC and CPALL [email protected] December-ended quarter earnings were mixed. Earnings for Namida Artispong +66 2857 7833 [email protected] ASEAN grocery retailers in the December-ended quarter saw Thailand exceeding expectations, Singapore-listed grocers’ Tiesha PUTRI +6221 30034931 [email protected] earnings in line, Indonesia and Philippines grocers underperforming. The varied country performances were Regional Research Team largely a function of domestic consumption fundamentals and operating environment. Domestic fundamentals for grocery retail in Singapore and Thailand remain strong, while that for Indonesia and Philippines were weaker.
Fundamentals for Singapore and Thailand remain strong. STOCKS We are most bullish on Singapore and Thailand grocery retail 12-mth Price Mkt Cap Target Price Performance (%) markets across ASEAN. In Singapore, there is more room for Bt US$m Bt 3 mth 12 mth Rating growth as HDB has lined up at least 11 new supermarket properties for bidding over the next six months. Although CP ALL 87.00 25,043 95.00 N.A N.A BUY Berli Jucker Public 56.25 7,205 70.00 N.A N.A BUY online grocery retail is a fast-growing segment, its market DairyCo. Ltd Farm 8.27 11,186 9.77 2.0 (4.7) BUY share remains low at <3% of the whole grocery market. In Sheng Siong 1.01 1,159 1.20 9.2 2.0 BUY Thailand, we expect better macro fundamentals and broad- MatahariGroup Ltd Putra 394 154 380 (7.5) (60.6) HOLD based recovery including better public investment, investment RobinsonsPrima Retail 84.00 2,236 87.00 (14.2) 7.7 HOLD PuregoldHoldings Price 51.95 2,761 44.30 (3.8) 23.1 UNDER sentiment, and industrial capacity to support consumption Club REVIEW growth. 7-Eleven 1.48 423 n/a (2.6) (12.4) NR Mynews Holdings 1.50 263 n/a 0.7 39.5 NR Advocate top-down stock-pick strategy. Our stock picks are formulated via a top-down approach, as the operational Source: DBS Bank, DBSVTH, DBSVI, First Metro Securities, Bloomberg Finance environment, demand as of December-ended quarter remain L.P. weak for Indonesia, Philippines and Malaysia, while Thailand Closing price as of 16 April 2018 and Singapore offer the best macro environment for grocery stocks to deliver earnings growth.
Top picks. Sector valuations are at 27x forward PE. Top picks are Dairy Farm [DFI SP, BUY], Sheng Siong [SSG SP, BUY], Berli Jucker [BJC TB, BUY] and CP ALL [CPALL TB, BUY]. We upgraded Dairy Farm’s target price and downgraded Robinsons Retail Holdings after its deal with Robinsons Retail Holdings to sell Rustan Supercenter Inc. for an 18% stake in RRHI. We have Robinsons Retail and Matahari Putra on HOLD given that they are showing lacklustre operational performance due to weak demand and challenging cost conditions.
ed: TH / sa:YM, PY, CS Page 1 Industry Focus ASEAN Grocery Retail
Table of Contents
Results review – Strong performance from Singapore and Thailand grocers 3
Singapore – No online threat, more upcoming HDB shops to be available for bidding 6
Thailand – Improving economy to support consumption 9
Indonesia – Weak operating environment 12
Malaysia – Cost challenges with high valuation 14
Philippines – Inflation and tax reform to dampen outlook 16
Company Guides 19
CP ALL
Berli Jucker Public Co. Ltd
Dairy Farm
Sheng Siong Group Ltd
Matahari Putra Prima
Robinsons Retail Holdings
Page 2 Page 2 Industry Focus ASEAN Grocery Retail
Results review – Strong performance from Singapore and Thailand grocers
ASEAN saw mixed earnings for quarter-ended December 2017 Moderately strong SSSG for most grocers which disclosed their figures. Same-store-sales growth (SSSG) was generally 4Q17 results were mixed. December-ended quarter saw mixed positive across ASEAN for major modern grocery retailers. The results with companies’ earnings performance tied strongly to only exception was 7-Eleven Malaysia which saw a negative their domestic economies. Singapore- and Thailand-listed stocks SSSG due to a weak retail environment. SSSG continued to be generally performed well while those in Indonesia, Malaysia and within reasonable levels of 0-5%. Sheng Siong, BIG C (Berli Philippines reflected challenges in their respective domestic Jucker) and CP All were the strong performers. markets. SSSG generally positive except for 7-Eleven Malaysia ASEAN Grocers' December 2017-ended results 20.0% Big C Supercenter Siam Makro Dec-end result Note CP ALL Sheng Siong Sheng Siong In line Gross margins improved 7-Eleven Malaysia RRHI Dairy Farm In line Core profit in line CP All Above Lower taxes Berli Jucker n/a New coverage Alfamart n/a Not covered Matahari Prima Putra Below One-off inventory clearance Discontinued unprofitable sales Puregold In line Margin decline including bulk sales of alcohol, cigarettes and discount coupons Robinsons Retail Below Dragged by department store for other bulk merchandise. 7-Eleven n/a Not covered -25.0% Mynews Holdings n/a Not covered 1Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q17 Source: DBS Bank Source: DBS Bank
Thai and Singapore grocers outperforming the rest of ASEAN. Long-term consumer sentiment generally positive. General Singapore stocks saw relatively stable demand environment, consumer sentiment in ASEAN remains buoyant compared to with concerns over online threat yet to come through as two years ago. The longer-term trend remains generally consumer demand continues to be largely in-store. Thailand positive, though we may have seen short-term weaknesses in has shown strong demand and store growth with companies some markets in recent quarters. Except for Philippines which showing better margins. Malaysia has been difficult with is implementing tax reform and Indonesia, quarterly consumer challenging cost environment. Indonesia has seen slowdown sentiment saw an uptick in Malaysia and Thailand based on in demand and slowing outlook for store expansion. the latest data. Philippines's results were poor on weak demand and tax reform package will likely dampen volume sales of products Better regional consumer sentiment than two years ago such as carbonated drinks.
130 50
Key recommendation changes 120 40 Stock Rating Rating TP 110 30 Change (TP change) 100 20 Sheng Siong BUY Unchanged 1.20 (na) 90 10 Dairy Farm BUY Unchanged 9.77 (+) CP All BUY Unchanged 95.00 (na) 80 0 Berli Jucker BUY Unchanged 70.00 (na) 70 -10 Matahari Prima Putra HOLD Unchanged 380 (-) 60 -20 MY TH ID PH (RHS) Puregold NA Under review 44.30 (prev) 50 -30 Robinson’s Retail HOLD Downgrade 87.00 (-) Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Source: DBS Bank Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: Bloomberg Finance L.P., DBS Bank
Page 3 Page 3 Industry Focus ASEAN Grocery Retail
Current grocery market fundamentals in ASEAN Our coverage universe trades at an average of 25x PE Market Market fundamentals (x) 40.0 Singapore Online threat remains small Thailand Strong demand and margin growth 35.0 +2sd: 34.7x Indonesia Weak demand environment, players strategising
Philippines Demand to be affected by TRAIN tax laws 30.0 +1sd: 30.4x Malaysia Higher opex and mixed top line observed Avg: 26x Source: DBS Bank 25.0
-1sd: 21.7x Highest growth format remains Supermarkets in Singapore 20.0 and Convenience Stores in developing ASEAN. While -2sd: 17.3x 15.0 prospects of ASEAN Grocery Retail have the highest long-term Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 growth rates pegged to convenience stores across ASEAN ex- Singapore (According to Euromonitor 5-year growth rates), Source: DBS Bank the current demand and operating environment especially in Malaysia and Indonesia convenience stores suggest weak Top picks are DFI, SSG, CPALL and BJC. We favour stock picks fundamentals in the form of near-term macro, competitive from Singapore and Thailand, with Singapore largely based and operational challenges. on valuation and Thailand on growth. We like Dairy Farm (DFI SP, BUY) for its attractive valuation. Core PE ex RRHI and Top-down stock-pick strategy ranks Singapore and Thailand Yonghui is valued at 18x. Sheng Siong (SSG SP, BUY) provides stocks the highest stable earnings, yield and resilience to volatility in earnings and stock price/market movement due to its low beta of Top-down selection approach ensures circumvention of stocks <0.5x. We see earnings growth from margin expansion at exposed to weak macro environment. We are adopting a top- Berli Jucker (BJC TB, BUY) driven by its glass business, while down stock-picking strategy for this sector at the current BigC should see positive SSSG and outlet growth. CP ALL moment as this ensures that our preferred picks are operating (CPALL TB, BUY) will continue to see store expansion of at in a stronger macro environment. We look to avoid stocks least 700 a year and better margins will come from more exposed to weak domestic macro environment as well. As an high-margin products and better cost management. initial stock positioning strategy, all our picks will have exposure to a more fundamentally stable operating Stock picks and drivers environment. Stock Rating Driver Sheng Siong BUY New stores to drive growth Singapore and Thailand’s fundamentals relatively stronger Dairy Farm BUY Core business undervalued than that in Indonesia, Philippines and Indonesia. Among the CP All BUY Store expansion and margins key ASEAN markets, both Singapore and Thailand have Berli Jucker BUY Store expansion and margins sounder grocery retail macro fundamentals and operating Matahari Prima HOLD Higher interest costs a drag environment. 1) SSSG momentum for both Singapore and Puregold Under Review Macro challenges/competition Thailand was positive; 2) the consumption environment in Robinson’s Retail HOLD Rustan acquisition a drag both markets continue to be strong if not stable; 3) both Source: DBS Bank markets have less economic uncertainties compared to Philippines (tax reform), Indonesia and Malaysia (weak Neutral on RRHI and MPPA. We have neutral calls on consumption environment), with Singapore deferring GST Robinsons Retail Holdings (RRHI PM, HOLD), and Matahari increase till at least 2021 and Thailand’s economy improving Prima Putra (MPPA IJ, HOLD). Puregold (PGOLD PM, UNDER on a broader-based recovery. REVIEW), is under review following recent results announcement. Sector trades at 27x forward PE. The ASEAN Grocery Retail sector trades at a valuation of 27x forward PE and close to our coverage universe’s long-term average. Markets with the higher-valuation stocks include Indonesia, Malaysia, and Thailand.
Page 4 Page 4 Industry Focus ASEAN Grocery Retail
Peers trade at an average of 27x forward PE
12 mth Mark et Operating Net Div idend TP Cap P/BV P/Sales ROE Margin Margin Yield Company Rating (S$m) Px Last PE (A ct) PE (Yr 1) PE(Yr 2) (x) (x) (%) (%) (%) (%) South East Asia Retailers DairyFarm Intl BUY 9.77 14,669 8.27 23.5x 21.5x 19.9x 5.8x 1.0x 29% 4.0% 4.5% 2.5% CP ALL BUY 95 32,900 87.00 39.3x 34.0x 29.4x 8.8x 1.5x 28% 6.8% 4.4% 1.5% Siam Makro NOT RATED n/a 9,598 47.50 36.9x 33.7x 32.3x 13.0x 1.2x 37% 4.3% 3.3% 2.0% Puregold HOLD 44.30 3,627 51.95 24.0x 21.9x 19.9x 2.7x 1.1x 13% 7.1% 4.9% 0.6% Robinsons Retail HOLD 87 2,937 84.00 23.4x 24.0x 21.9x 1.8x 1.0x 9% 5.2% 4.1% 0.8% Sumber Alfaria NOT RATED n/a 2,217 560 77.4x 39.6x 38.5x 4.6x 0.4x 6% 1.7% 0.5% 0.8% Matahari Putra HOLD 380 202 394 nm nm nm 1.4x 0.2x 1% 1.0% 0.1% 0.0% PSC NOT RATED n/a 2,293 120 68.9x NaN NaN 15.0x 2.8x 24% 6.1% 4.1% 0.3% Sheng Siong BUY 1.20 1,519 1.01 21.8x 21.0x 19.6x 5.2x 1.8x 26% 9.0% 8.5% 3.3% Hero Supermarket NOT RATED n/a 373 935 nm NaN NaN 0.8x 0.3x -4% -1.9% -1.5% n/a Bison Cons NOT RATED n/a 346 1.50 18.6x 15.3x 12.9x 2.3x 1.1x 16% 9.4% 7.4% 1.0% 7 Eleven NOT RATED n/a 617 1.48 26.9x 23.1x 20.6x 26.7x 0.6x 130% 4.1% 2.8% 3.5% Berli Jucker BUY 70.0 9,466 56.25 42.7x 33.4x 29.6x 2.0x 1.4x 6% 8.7% 4.2% 1.5% Regional average 29.3x 26.7x 24.5x 6.9x 1.1x 24% 4.9% 3.5% 1.5%
Source: DBS Bank, DBSVTH, DBSVI, First Metro Securities, Bloomberg Finance L.P.
Page 5 Page 5 Industry Focus ASEAN Grocery Retail
Singapore – No online threat, more upcoming HDB shops to be available for bidding
Results within expectations despite Amazon’s entry into More positive supermarket retail sales recovery in 2017 vs Singapore 2016
% chg y-o-y SGX-listed grocers’ earnings were within expectations. Full- 8 year December 2017 core results for both Dairy Farm and 6 Sheng Siong came in within expectations, notwithstanding Dairy Farm had a one-off business restructuring costs relating 4 to store closures which led to headline profit coming in below 2 expectations. 0
Sheng Siong unfazed, despite the entry of Amazon prime in -2
2H17. Despite the entry of Amazon Prime in 2H17, results for -4 Sheng Siong remained unfazed as market demand for -6 supermarkets remained stable. There was no letup in both Jul-11 Jul-16 Jan-09 Jan-14 Jun-09 Jun-14 Oct-12 Oct-17 Feb-11 Feb-16 Apr-10 Sep-10 Apr-15 Sep-15 sales growth (+3% y-o-y for 2H17) and sales per square feet Dec-11 Dec-16 Nov-09 Nov-14 Mar-13 Aug-13 May-12 May-17 (psf) matrices (averaging at a robust S$1,917psf for 2H17). Source: ThomsonReuters Datastream, DBS Bank Core SSSG for 3Q17 was +1.7% and +2.1% for 4Q17. Normalised gross margin for 4Q17 was near a high at 26.5%. Online grocery retail sales remain small as big 3 gain market shares on traditional grocery retail channels Dairy Farm undergoing strategic review for Southeast Asia. Strong FY17 performance in North Asia was offset by weaker Online remains small at <3% of the market though growing performance in Southeast Asia. North Asia’s Convenience fast. Online’s share of grocery retail remains small in Stores and Health & Beauty segments were strongly led by Singapore, though fast growing. Singapore’s Modern Grocery stronger visitor arrivals, but Supermarkets were weak in Hong Retail (MGR) market is worth S$6bn. Based on our estimates, Kong, Taiwan and Southeast Asia. New CEO Ian McLeod, the online share of grocery retail sales is still small at less than who took helm since September 2017, has already rung in 3%. changes to the business at both the personnel (managerial) and storefront (merchandise and display) levels. Internet players still dominate online grocery retail sales Underperforming stores were closed, leading to one-off but online accounts for < 3% of total MGR sales business restructuring costs. Dividend per share of 21 UScts for the full year was maintained even though one-off charges Modern Grocery led to lower headline earnings. We do not see another large- Retail 71% Grocery chains scale store closure recurring as the key closures for targeted 1% stores were already made.
Online sales Supermarket sales growth momentum to continue, on decent 2% 2018 GDP growth expectation
Online players Supermarket sales have recovered in 2017; expect Traditional grocery 1% retail momentum to continue in 2018 based on GDP growth of 27% 3%. Based on Supermarket & Hypermarket retail sales index by Singstats, 2017 saw a marked recovery in sales, posting a Source: Euromonitor, DBS Bank estimates y-o-y increase of 1.5% to 4.5%. GDP growth in 2017 was 3.6%, up from 2% in 2016. Our economics desk forecasts 2018 GDP to be slightly slower at 3% but much stronger than 2016’s 2%, driven by the services sector. We hence expect supermarket sales to stay positive in 2018 on the back of a modest GDP growth outlook. January and February retail sales for supermarkets remain healthy posting net 8.7% growth.
Page 6 Page 6 Industry Focus ASEAN Grocery Retail
Singapore modern grocery retail market share Score competes against Lazada and Redmart’s LiveUp
Others, 9%
Sheng Siong, 14%
NTUC Fairprice, 48% Source: member.lazada.sg, DBS Bank
Alliance promotes customer loyalty within the group of companies. These tie-ups are a way to gain customer loyalty Dairy Farm, 29% and to promote more intense usage of services within the alliance. Membership fees will encourage members to spend Source: Euromonitor, DBS Bank more and earn higher rebates that will defray and gain a leverage on fixed membership costs. Big 3 gaining share, traditional channels forecast to decline. The big 3 (Dairy Farm, Sheng Siong and NTUC Fairprice) Score vs Live up membership programmes continues to dominate over 90% of Singapore’s modern Categories Live up Score grocery retail market while wet markets and traditional retail Groceries Redmart NTUC Fairprice are forecast to decline at a 7-year CAGR of -4% from 2017- Transport Uber Grab 2022 (according to Euromonitor). Smaller product range, busy Concierge Ubereats consumer lifestyle, and short opening hours of wet markets Online entertainment Netflix are some of the factors driving this decline. Online marketplace Taobao
Online marketplace Lazada More convergence between internet players and traditional Membership fee S$49.90 S$29.901 offline players Promotional fee S$28.80 S$182
Another online membership programme launched. NTUC 1) first year only, second year at S$49.90 Fairprice and Grab on 19 March launched Fairprice-Grab 2) till 18 May 2018 membership subscription programme named Score, offering Source: Lazada, Score, DBS Bank consumers rebates on supermarket purchases and discounts Dairy Farm hives off Philippines supermarket chain Rustan on Grab rides.
Swaps ownership in Rustan for shareholding in RRHI. Dairy More tie-ups between payment systems and supermarkets Farm has entered into a deal with Robinson’s Retail Holdings in Singapore Inc. (RRHI) to sell off its 100% stake in Rustan Supercenter
Inc. for a 12.15% stake in RRHI and in addition, it will buy
over an additional 6.1% stake in RRHI from major
shareholders comprising the Gokongwei family for US$174m
or P94 per share. Dairy Farm will own 18.25% in RRHI as a
result. Dairy Farm is giving up a business (including store
locations, ranging, supply chain, etc.) which it has improved
since it initially invested in 2012.
Positive for Dairy Farm. We see the deal as positive for Dairy
Farm as it swaps the value of a loss-making Rustan for shares
of RRHI. As of FY17, Rustan continued to be in EBIT losses as Source: Grab.com, DBS Bank we understand. This well compensates for the P94 per share it
is paying to the Gokongwei family for the additional 6.1%
stake, which is above market price. The stake in RRHI also
contributes another 9-12% in JV/associate income and c.3-
4% to net profit going forward.
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Industry Focus ASEAN Grocery Retail
Positive HDB store opening outlook, with more reasonable Maintain BUY for both Dairy Farm and Sheng Siong market rental rates than in 4Q16 Maintain BUY on SGX-listed grocers. We remain positive on More reasonable rental rates for new HDB supermarket both Sheng Siong and Dairy Farm with BUY recommendations biddings. Recent new HDB supermarket properties’ bidding and TPs of S$1.20 and US$9.77 respectively. Online grocery has remained more reasonable at around S$12-16psf. retail, although fast growing, account for less than 3% of Supermarket bidders are now more rational than in 4Q16, Singapore’s entire Modern Grocery Retail market. We will where smaller players with a focus to win stores bid up rental continue to see most transactions being made outside of rates to over S$20psf. online platforms in the immediate future. Besides, more new HDB supermarket properties will be put out over the next six HDB rental rates remain at S$14-16psf range months, driving new store growth for supermarket players in Singapore. There are 12 more units earmarked for S$ psf 22 supermarkets in eight estates pending completion from 3Q18-2021. 20
18 Dairy Farm International (DFI SP, BUY, TP: US$9.77). We 16 expect store performance to strengthen at Dairy Farm. Strategic review in Southeast Asia on store management, 14 merchandising, pricing, procurement and product range 12 amongst others will be carried out over time, to strengthen 10 store efficiency. We have also assessed that the recent deal with Robinson’s Retail Holdings Inc. (RRHI) over Rustan Supercenter Inc. would add US$0.23 to our TP. DFI’s core business currently trades at 16x FY18F PE, below peer average Source: place2lease, DBS Bank of 24x and 9-year historical average of 25x. Our target price of US$9.77 is based on sum-of-parts valuation methodology More new supermarkets planned in HDB estates. Upcoming comprising core business at US$7.72 using DCF, 20% and HDB supermarket space remains robust. There will be 11 new 18% stakes in Yonghui and RRHI at market values of US$2.28 HDB supermarkets up for bidding in the next six months with and US$0.31 respectively; and net debt of US$0.54 per share a total floor area of close to 70,000 sqft. Most stores will be (post financing of its 6.1% stake in RRHI). mid-sized supermarkets. Sheng Siong (SSG SP, BUY, TP: S$1.20). We see Sheng 11 new HDB supermarkets for bidding in the next six Siong’s growth driven by new stores. Sheng Siong has already months space remains robust opened three new stores in FY18 and will open another in April. With 11 more upcoming HDB stores for bidding in the Estate Precinct name sqft sqm next six months, there is scope for Sheng Siong to win more Woodlands 693 Woodlands Ave 6 5,382 500 stores, that will benefit future growth and cashflows. Wage Punggol West 231 Sumang Lane 5,382 500 credit extension by the government may benefit earnings and Yishun 675 Yishun Ave 4 5,382 500 EPS as well going forward. The stock currently trades at 21x Bukit Batok 292 Bukit Batok East Ave 6 5,382 500 FY18 PE. It also offers a dividend yield of 3.6%. Our TP of Bukit Batok 440 Bukit Batok West Ave 8 5,382 500 S$1.20 is based on 25x forward PE. Bukit Batok 451 Bukit Batok West Ave 6 6,458 600 Sembawang 365 Sembawang Crescent 5,382 500 Sembawang 361 Sembawang Crescent 5,382 500 Sengkang 351 Achorvale Road 5,382 500 Yishun 461 Yishun Ave 6 10,764 1,000 Woodlands 182 Woodlands St 13 8,611 800 Total 68,889 6,400 Source: place2lease, DBS Bank
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Industry Focus ASEAN Grocery Retail
Thailand – Improving economy to support consumption
Strong growth seen in 4Q17 SSSG for Dec ended quarter ranged from 2-4%
20.0% Boosted by strong top-line growth and better margins. Thai Big C Supercenter Siam Makro CP ALL grocery players, CP ALL (CPALL) and Berli Jucker (BJC), posted strong double-digit earnings growth for 4Q17, stemming from solid SSSG, outlet expansion, and healthier EBIT margins. CPALL’s 4Q17 results were ahead of our estimates on lower- than-expected income tax expense while BJC’s earnings figures were in line with our expectations. Discontinued unprofitable sales including bulk sales of alcohol, CPALL is growing on all fronts. For CPALL, both its cigarettes and discount coupons for other bulk merchandise. convenience store and cash-and-carry segment (MAKRO) businesses drove the robust earnings growth in the quarter. -25.0% The group’s y-o-y earnings growth was fuelled by positive
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 SSSG, store expansion, fatter gross margin, lower interest Source: Company, DBSVTH expense from the issuance of perpetual debentures, and a lower effective tax rate. CPALL posted SSSG of nearly 4% for Positive domestic consumption environment its convenient store business and 2.1% for its cash-and-carry operations. The improvement in EBIT margin was mainly from Improving economy to drive domestic consumption in 2018. gross profit expansion at its cash-and-carry unit – thanks to an For 2018, Thailand’s economy is forecast to grow 4.6% and increase in the proportion of high-margin products in sales, 4% by the NESDB and DBS Bank respectively. While 2017 more efficient inventory management which resulted in a GDP was boosted mainly by export and tourism, we expect to lower shrinkage rate, and the performance of Indoguna see a more broad-based recovery in 2018. Positive momentum Group. As at end-2017, CPALL had 10,268 convenient stores should be supported by a pick-up in public investment as nationwide (vs 9,542 as at end-2016 and 10,152 as at end- projects awarded last year begin construction, as well as on 3Q16) while MAKRO operated 123 stores (vs 106 in 2016 and improving business sentiment and rising industrial capacity 120 as at end-3Q16). CPALL also divested 230.25m shares in utilisation. Exports should remain strong amid a continued MAKRO at Bt44/share in an overnight private placement to global economic recovery while the Thai tourism industry local and foreign investors at end-March at a 13.7% discount should also remain resilient. However, the economic recovery to MAKRO’s last closing price. has only been seen in Bangkok, tourist destinations, and major cities so far. BJC also saw strong top-line growth and margin expansion. BJC’s modern retail supply chain also reported robust y-o-y Election to support consumption. Despite the emergence of earnings growth for 4Q17 from solid SSSG of 3.8%, store positive factors such as export growth and rising economic expansion, larger rental space, higher rental rate, increasing indicators, consumer confidence dropped for the first time in income from brochure advertising as well as in-store media seven months in February as people were worried about the concessions, and especially an expansion of net profit margin political situation, the baht's strength, and the minimum wage by 222bps y-o-y. A jump in net profit margin was attributed to hike. Due to legislative processes, the general election is likely its merchandising strategy (in fresh food, home-line products) to be delayed from November 2018 to February 2019. and inventory management (including supply chain efficiency However, we still believe the election will be held and this improvement and aggregating deliveries from smaller should help boost domestic consumption and bring back suppliers). BJC had a total of 125 hypermarkets, 15 BIG C investors’ confidence. In terms of THB against USD, it has Extra, 60 BIG C Market, and 642 Mini BIG C across Thailand as gained 4.7% QTD, making it Asia's second-best performing at end-2017. currency after Japan's yen this year. However, our Thailand economist forecasts export growth to remain decent at 5.7% (y-o-y) in 2018 as economies, especially ASEAN, remain buoyed by strong trade trends.
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Industry Focus ASEAN Grocery Retail
Expect minimum wage increase to boost consumers’ Asia: Comparative daily minimum wage purchasing power Country GDP growth Inflation % Daily min wage (USD)
Indonesia 6.7% 3.9% 3.29 Higher minimum wage from April 2018. The minimum daily Vietnam 5.9% 3.7% 4.89 wage will be increased nationwide from April 2018. The Malaysia 5.0% 4.0% 7.54 increase in the daily rate will be in the range of Bt5-22, Thailand 3.8% 0.6% implying a hike of 2-7% above current levels and the rate will 9.20 vary by province, depending on the cost of living, per-capita Philippines 6.1% 3.2% 9.52 income, inflation rate, living standard, production cost, Source: Thai National Shippers’ Council, DBSVTH product and service prices, as well as the economic growth of each province. Manufacturing and service industries will be Labour costs likely to increase, but minimal impact on both the most affected but listed companies should be less hit as BJC and CP All. The Ministry of Commerce also does not most of the workers are already paid well above the minimum expect a major increase in the cost of production of goods or wage. exports (+0.1%) which we believe is likely due to a lower proportion of labour which is due for a minimum wage Thailand has hiked minimum daily wage rate by 2-7% increase. For grocery retailers in Thailand, we see only slight Min wage Prov inces impact on labour costs as less than 15% of workers are (Bt) affected at CP All, while wage increases are expected to be 308 Three provinces including Narathiwat, Pattani, and Yala offset by better scale and higher margins from the non- 310 22 provinces grocery retail business at BJC. Besides, according to the Thai 315 20 provinces Retailers Association (TRA), costs for retailers are expected to 318 7 provinces rise by only 1.7-2.3%. 320 14 provinces including Chiangmai 325 7 provinces including Bangkok Competition in the hypermarket segment to be more 330 Three provinces including Chonburi, Phuket, and Rayong aggressive this year. Tesco Lotus Thailand (Tesco TH) has its Avg 315.97 first Thai new CEO this year and the new CEO has been very aggressive in terms of pricing strategy. Tesco TH launched its Source: NESDB, DBSVTH annual ‘Price Rollback’ campaign after Chinese New Year. This campaign is its biggest discount programme ever, Wage hike to boost consumption, but retail prices likely to be offering the deepest and widest discount in the company's 15 in line with wage increase. With as much as 12% of workers years in Thailand and covering more than 1,000 items with still earning less than the minimum wage rate, we expect the discounts of up to 40%. The discounts this year will also cover minimum wage hike to boost overall purchasing power and fresh food, contrasting with its focus on dry and non-food consumption, especially on basic necessities such as groceries. products in previous years. Additionally, the campaign will be As the Ministry of Commerce would be keeping an eye on applied to all of Tesco TH’s formats from hypermarkets to many grocery retailers to ensure the prices of consumer items express stores and its online platform. are kept in line with the increase in wages, we believe the price increases would not be excessive.
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Industry Focus ASEAN Grocery Retail
Overweight Thai grocers on growth prospects
CP ALL (CPALL TH, BUY, TP: Bt95). We remain positive on Berli Jucker (BJC TH, BUY, TP: Bt70). BJC’s FY18F growth CPALL, given its defensive nature, business resilience, visible profile looks promising as the operations of every business expansion plan, market leadership, healthy earnings growth, segment are on an upward trend, alongside lower taxes and and high ROE of close to 30x. CPALL will benefit from the the potential of expanding its retail operations in ASEAN. Its recovery in domestic consumption and rising purchasing packaging business will get a tailwind from increasing glass power as it sells mainly consumer products. This would further production capacity, which would enhance its operating support SSSG in both its CVS and cash-and-carry businesses. margin as the company will rely less on importing some bottle Meanwhile, CPALL still targets to open at least 700 7-Eleven parts. Meanwhile, improving domestic consumption should stores per annum. Despite its plans to add new stores, the lead to higher demand for consumer products and spotlight remains on lifting margins by increasing the mix of accelerating government budget disbursement on public high-margin products (health and beauty) and controlling health should support its healthcare business. Positive SSSG expenses. FY18F profit is projected to rise 18.1% y-o-y to (supported by its merchandising strategy in fresh food and Bt23bn. Our TP, based on DCF (WACC 9.4%, terminal growth home-line products, improving domestic consumption, and rate 3%), is Bt95. plan to expand its customer base) and a continuous rollout of outlets will drive its modern retail operations going forward. Our TP, based on DCF (WACC 7.4%, terminal growth rate 3%), values the stock at Bt70.
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Industry Focus ASEAN Grocery Retail
Indonesia – Weak operating environment
Weak consumption environment led to declining SSSG PT Hero’s Supermarkets and Hypermarkets segment a drag. Revenue declined by 7% y-o-y in FY17, dragged by negative Weak purchasing power weighed down grocery sales last SSSG and weak performance in Supermarkets and year. The year 2017 was challenging for grocery retailers as Hypermarkets as Food business dragged Health & Beauty consumers cut spending on both basic and discretionary (Guardian) and IKEA’s positive performance which grew needs. Sales growth of 58 FMCG categories tracked by 10% y-o-y. One-off costs of Rp366bn, related mostly to Nielsen decelerated to 2.5% y-o-y in 2018, from 7.8% y-o-y impairment of assets and stock clearance or write-offs in the in 2017 with volume declining by 2.3% y-o-y in 2018 vs. an Food business, led to net losses of Rp191bn versus Rp121bn increase of 2% y-o-y in 2017. profit in FY16. Excluding such costs, core profit before tax would have increased 71% to Rp281bn. Alfamart saw slower sales growth, lower margins. Alfamart (AMRT) reported a 1.7% decline in same-store sales in FY17 Minimarkets growing faster than hypermarkets and as weak economy prompted consumers to cut spending. It supermarkets added 1,100 stores in FY17 (+8% y-o-y), lower than the initial target of 1,400 stores. AMRT’s revenue grew 10% y-o-y in Consumers favour minimarkets as they offer convenience and FY17, decelerating from the 18% growth booked in FY16. competitive pricing. Minimarket operators continued to Key weaknesses were seen in stores located around the expand aggressively last year with the two largest players greater Jakarta area. EBIT declined by 18% y-o-y on higher adding c. 2,000 new stores, as consumers continue to shift opex, particularly salary (+15% y-o-y) and rent (+24% y-o-y). away from traditional channels and hypermarkets to In FY17, AMRT’s EBIT margin stood at 1.7% vs. 2.3% in minimarkets, which offer convenience and competitive FY16. Net profit dropped by 50% y-o-y as debt level rose. As pricing. From 2014-2017, minimarket (or convenience store)’s at end-December 2017, AMRT had Rp7.8tr interest-bearing share of Indonesia’s Modern Grocery Retail market grew at debt, translating into gross and net gearing of 1.5x and 1.3x the expense of supermarkets and hypermarkets by 3ppts from respectively (vs. 1.1x and 1.3x respectively as at end- 47% to over 50%. December 2016). Cash conversion cycle weakened to 13 days in 2017 from 10 days in 2016, mostly due to lower inventory Indonesia’s modern grocery retail market share turnover. Looking ahead, AMRT looks to improve its cash 100% conversion cycle by requiring principals to pay a cash deposit 90% for joint promotion programme. 80% 47.2% 50.2% 70% Matahari’s inventory clearance led to higher losses in 4Q17. 60% Revenue was in line with expectations at Rp2.95tr in 4Q17 (- 50% 40% 9% y-o-y, +2% q-o-q). and Rp12.56tr (-7% y-o-y) for FY17. 33.2% 31.4% 30% However, it stepped up its inventory clearance programme in 20% 4Q17, which resulted in EBIT losses of Rp1.11tr and net loss 10% 19.6% 18.3% of Rp858bn in 4Q17. Net loss for of FY17 was Rp1.24tr, far 0% higher than our expectation of Rp277bn. Gross margin 2014 2017 turned negative in 4Q17 (at -11.9% vs. 3Q17 gross margin Hypermarket Supermarket Convenience store of 12.3% due to heavy discounting). On the other hand, Source: Euromonitor, DBS Bank working capital cycle improved significantly to 11 days in
2017 from 20 days in 2016 due to faster inventory turnover.
The company closed five Hypermart outlets in FY17 but added three new stores during the year. It also closed a number of non-performing Foodmart Express outlets in
Kalimantan. Despite stronger commodity prices and exports last year, the company has yet to see any significant improvement in ex-Java outlets.
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Industry Focus ASEAN Grocery Retail
Modern grocery retail players still recalibrating themselves PT Hero in strategic review of its Food Business. PT Hero is conducting a strategic review of its Food Business for loss- Hypermarket players reformat stores. To improve its making stores, merchandise including stock clearance of profitability, MPPA looks to scale down its store size from poorer-quality products and product range, pricing strategy, 4,000 sqm initially to 3,000 sqm gradually, starting from 20 and promotions. Hero Supermarkets are also being upgraded outlets (out of 113 outlets) in 1H18. The company also plans through its store revitalisation programme. PT Hero has to rationalise its SKUs by cutting slow-moving, discretionary partnered with GO-JEK since 4Q17 to put its groceries up for items and instead focusing only on basic needs. sale on GO-MART with delivery fulfilled by GO-JEK. They join all major supermarkets on the platform including Alfamidi, Carrefour transforming into a one-stop shopping concept. Superindo and Ramayana. Guardian and IKEA have also Meanwhile, the largest hypermarket operator Carrefour is in posted positive performances. Guardian is recovering from its the process of revamping its outlets into Transmart Carrefour, 2016 store rationalisation programme especially in the Beauty which offers a one-stop shopping concept, similar to segment, while IKEA is generating strong sales driven by department stores. Transmart Carrefour outlets offer not only higher footfall. IKEA online started nationwide coverage from groceries but also fashion and beauty products, electronics, 4Q17 as its third IKEA e-commerce Distribution Point in Giant restaurants and entertainment. Ekstra Harapan Indah opened. A second IKEA store has been planned at Jakarta Garden City. Alfamart to reduce pace of store expansion in 2018. After seeing a weak top-line growth in FY17, Alfamart is slowing Remain neutral on MPPA down expansion with a new store target of 800 stores (vs. FY17 initial target of 1,400 new stores). Given the high Maintain HOLD for MPPA (MPPA IJ, HOLD, TP: Rp380). MPPA gearing profile and stretched inventory days, the company is went through 2017 with a massive cost-cutting exercise by opting to improve its business model rather than expanding reducing the number of employees at the store level (by up to aggressively in 2018. Its competitor Indomaret is also slowing 50%) and cutting headquarters costs. It also ended with down expansion with new store opening target of 1,000 this healthier inventory days of 68 days in 2017 (vs. 2014-2016 year, lower than its 2017 target of 1,500 new stores. We range of 75-85 days) after flushing out slower-moving think this could lessen the price competition between merchandise. We believe cost-saving initiatives such as minimarket and supermarket/hypermarket operators in downsizing stores will improve profitability in 2018. We Indonesia. maintain HOLD on MPPA with a lower target price of Rp380 (from Rp450 previously) after factoring in higher debt and interest expense assumption on its fund-raising exercise. The stock could also see new growth drivers over the longer term by raising Rp800m to embark on a new transformation strategy based on the principles of price leadership, omni- channel retailing, efficiency, and an ultimate focus on serving the evolving lifestyle and aspirations of its customers.
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Industry Focus ASEAN Grocery Retail
Malaysia – Cost challenges with high valuation
Challenging environment for convenience store operators Although management has targeted 200 gross stores openings for FY18, we believe that the target could be a tad Malaysia’s listed convenience store operators reported stretched given that 1) a key part of management's strategy is unexciting quarterly results. The recent quarterly results on improving operational efficiency of its store and optimising reported by both the two listed convenience store operators, cost structure, and 2) we understand that management is 7-Eleven Malaysia Holdings Bhd (SEM) and Mynews Holdings turning more selective on its new store locations. Bhd (Mynews) were unexciting and continue to imply a challenging operating environment going forward. Mynews saw disappointing 1Q results. Mynews’s 1QFY18 results (end-January) was flat y-o-y at RM6.3m (20% q-o-q), 7-Eleven's earnings boosted by higher-than-expected accounting for 21% of FY18 street estimates. We deem the operating income. SEM’s 4QFY17 earnings grew by 66.5% to results to be below expectation as 1QFY18 is typically a strong RM15.9m on the back of a 4.3% y-o-y improvement in quarter for Mynews. Although revenue grew 18.2% y-o-y revenue to RM546.2m. Although the headline earnings for due to new store expansion and better product mix, its the quarter seem impressive, we understand that it was bottom line was dragged by higher operating expenses, mainly boosted by additional compensation income from which surged by 32.4% y-o-y to RM25.3m in tandem with vendors amounting to RM9.3m. the higher number of stores – from 307 in 1QFY17 to 366 in 1QFY18. The additional compensation came from 1) a retail system provider on project delays in implementing the group’s retail Continuing its rapid growth. Going forward, the group is system, and 2) its logistic suppliers, arising from late delivery aiming to 1) continue its network expansion by adding 90 of SEM’s products to its outlets back in 1QFY17. Should we stores in FY18, 2) increase warehouse capacity, and 3) strip off these non-recurring compensation income, the broaden its food and beverage (F&B) product offerings. group’s earnings would have only come within expectations. The group had acquired a semi-detached factory in Tebrau, The 4QFY17 revenue growth of 4.3% was mainly driven by 1) Johor, which will be its second distribution centre for the new store openings, and 2) better product mix. In fact, the southern region. It has the capacity to serve up to 80 outlets. group’s SSSG contracted by 1.9% during the quarter, on the At present, Mynews has 35 outlets in Johor and Melaka. This continued weak retail environment. SEM opened 126 new new distribution centre is expected to be fully commissioned and closed 23 existing stores in FY17, missing its own by the end of this month. guidance of 150 new stores per year. It also missed its 130- store refurbishment target, after renovating only 90 stores in Mynews is also focusing on expanding its F&B segment as this 2017. carries a better GP margin (c.40%). By undertaking such product expansion, the group is planning to gradually reduce Will focus on improving cost efficiency and product offerings. its dependence and shift the space allocated per store from Moving ahead, the group will focus on 1) improving print media to F&B products. operational efficiency, 2) optimising its cost structure, and 3) commercial innovation. Management is improving its store Besides that, Mynews is constructing a food processing facility maintenance model and its supply chain to 1) reduce in Rawang (adjacent to its Central Distribution Centre) which maintenance backlogs, 2) ensure better inventory is expected to be completed by the end of this year. This management, and 3) enhance its logistics efficiency. We facility is mainly to expand its fresh food product offerings gather that SEM will be shifting to a new centralised (sub-segment of F&B). To optimise this new venture, the distribution centre (CDC) in Shah Alam by mid-2018. group has entered into joint ventures with two established Management is optimistic that the new inventory Japanese F&B companies, Gourmet Kineya and MRA Bakery, management technology and warehouse design will enable which are specialised in the ready-to-eat (RTE) food segment. the group to reduce its costs going forward. These JVs are expected to offer better food quality to customers and could increase store footfall.
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Industry Focus ASEAN Grocery Retail
Retail industry growth is improving but unexciting CVS to post a 5.1% CAGR. Nonetheless, Euromonitor estimates that convenience stores (CVS) in Malaysia will enjoy Strong economic data, but not retail sales. Although 2017 a strong CAGR of 5.1% between 2017 and 2019, outpacing GDP growth of 5.9% has surprised on the upside, boosted by Malaysia’s entire grocery retail market. Drivers include the manufacturing and services sectors, we observe that the shift of consumer preference to stores that offer more strong headline GDP data does not translate into robust retail convenience or time savings when shopping for groceries. growth. According to Retail Group Malaysia Sdn Bhd (RGM), CVS offer 1) open and easy accessibility, 2) limited queuing the retail industry grew by only 2% in 2017, which came time, 3) dynamically displayed and easy-to-find products, and below expectations. RGM has subsequently cut its 2018 4) items that are rarely out of stock; and are therefore gaining industry growth estimates to 4.7%, from the initial forecast of popularity among the urban and time-starved consumers. 6%. Market size of selected grocery retailers (2015-2019) Retail industry undergoing consolidation. In fact, during an
RM'm 15,680 15,571 15,447 15,309 interview with a local media, Mr Tan Hai Hsin, the managing 15,189
18000 13,911 13,821 13,681 13,449 director of RGM, highlighted that the retail industry is going 13,207 16000 through a consolidation phase and continues to witness the 14000 9,756 closure of established overseas and local retailers in Malaysia. 9,363 8,994
12000 8,648 It was reported that Parkson Holdings Bhd has closed four 8,324 10000 stores since September 2017. Dairy Farm subsidiary GCH 8000 4,040 3,841 3,623 3,364
Retail (M) Sdn Bhd, which operates supermarkets and 3,127 6000 hypermarkets such as Giant and Cold Storage in Malaysia, has 4000 reduced its number of stores from 146 in April 2016 to 134 in 2000 February 2018. 0 2015 2016 2017 2018 2019 Convenience stores (CVS) outpacing growth of modern grocery Convenience Stores Hypermarkets retail market Supermarkets Independent Small Grocers Source: Euromonitor, DBS Bank 1.1% CAGR growth of grocery retail market for 2017-19. According to Euromonitor, the grocery retail industry in Competition overshadows. The number of CVS in Malaysia Malaysia grew by only 1% y-o-y in 2017 and it expects a has expanded rapidly over the past four years at a CAGR of CAGR of 1.1% between 2017 and 2019, which is a rather 12%. Despite the bright prospects of the industry, we wish to uninspiring growth rate. highlight that its operating landscape is becoming increasingly competitive. While the CVS format’s top-line growth is Market value of Malaysia’s grocery retail (2015-2019) expected to be positive going forward, we see earnings growth being dampened by 1) uninspiring SSSG due to RM'm Grocery Retailers increased competitive landscape, and 2) higher operating 65000 costs driven by higher staff costs and rental expenses. 64000 Convenience Stores: Number of stores (2015-2019) 63000 Number of stores 2014 2015 2016 2017 62000 7-Eleven Malaysia 1,743 1,910 2,096 2,160 61000 99 Speedmart 570 708 839 1,000 myNEWS.com 195 230 247 315 60000 KK Super Mart 165 195 214 262 59000 Family Mart - - 2 18 2015 2016 2017 2018 2019 My Mart 8 10 12 12 Source: Euromonitor, DBS Bank Others 60 62 71 74 2,741 3,115 3,481 3,841 Source: Euromonitor, DBS Bank
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Industry Focus ASEAN Grocery Retail
Valuation is not conveniently priced
Malaysia grocers trade at above average valuations. Both SEM and Mynews are currently trading at rich valuations of 33x and 37x FY18 PE respectively. Although prospects for the sector remain bright, we continue to believe that the competitive environment remains challenging. Furthermore, the recent quarterly results released by Mynews illustrate that cost pressure could be a key risk to watch going forward.
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Industry Focus ASEAN Grocery Retail
Philippines – Inflation and tax reform to dampen outlook
RRHI earnings miss, PGOLD earnings are largely in line Negative for RRHI, positive for DFI. We view the deal to be negative for existing shareholders in the near-to-medium term PGOLD FY17 headline earnings largely within estimates. due to the earnings dilution, lower margins from having to PGOLD earnings for FY17 were P5.8bn (+9.0% y-o-y), largely absorb a loss-making business, and lower ROE. Nevertheless, within ours and consensus expectations. SSSG was 6.2% and we see the deal to be constructive in the long term as it 6.5% for Puregold and S&R respectively on the back of improves RRHI’s competitiveness, though not a game P12.45bn (+10.6% y-o-y) revenue, driven by the Puregold changer. We believe management can turn around Rustan segment. Gross margin remained flat at 16.6%, while opex but it will take some time before we see a meaningful positive grew faster at 12.5% y-o-y, leading to consolidated EBIT/net impact on RRHI’s earnings. profit margin contraction of c.20/30bps y-o-y. The higher OPEX can be attributed to increase in minimum wage, higher Tax Reform for Acceleration and Inclusion (TRAIN) Package 1 manpower, and aggressive expansion. kicked in in mid-January 2018
RRHI's FY17 earnings behind estimates. RRHI reported 4Q17 1Q18 to see higher prices, stronger SSSG and lower volume net profit of P1.49bn (-2.6% y-o-y), bringing its FY17 net sales of sugar-sweetened beverages. Based on our channel income to P4.98bn (+3.1% y-o-y) or 94% of our full-year checks, we have observed sharper price increases in the list of forecast – below our and consensus estimates. 4Q17 revenues grocery items (including branded packaged food and grew by 8.2% y-o-y to P34.1bn, mainly driven by healthy y-o- beverage products) that we follow in the Philippines. We are y performances and resilient SSSG of the Supermarket, DIY of the view that packaged food and beverage manufacturers Store, and Specialty Store businesses. Department Store are using the TRAIN Package 1 as an excuse to raise prices, segment remained most challenged amid high-base effects, some at a rate higher than the implied tax rate. We also prolonged decrease in GFA (due to massive renovation of expect SSSG to be stronger as shoppers stock up prior to the Robinsons Galleria), and a generally strong competitive price increase. For the likes for RRHI, which benefits from the landscape. Blended SSSG normalised to 2.7% for the full TRAIN Package 1, supermarket SSSG will likely come in above year, which was expected, coming from a high base from an 5.0%. As for PGOLD, we see 1Q18 SSSG at a slower pace election year (2016 SSSG: 6.7%). FY17 consolidated margins 2.0-3.0% given its target market’s high sensitivity to price expanded with higher gross profit margin (+40bps to 22.3%) inflation. Besides, given the imposition of excise tax on sugar- as well as EBIT margin (+30bps to 5.5%). sweetened beverages, we believe groceries, convenience stores, etc., will likely report lower volume sales of sugared Rustan Supercenters Inc. sold to RRHI beverage items in 1Q18. Store managers whom we talked to have acknowledged a slowdown in volumes sales on RRHI acquires Rustan Supercenters, Inc. from Dairy Farm. RRHI carbonated drinks and other sugar-sweetened beverages. and Dairy Farm International (DFI) entered an agreement that involved DFI selling its 100%-ownership stake in Rustan 1Q18 margins to expand on price-protection measures. Supercenters, Inc. (RSCI, Rustan) in exchange for 12.15% new Despite the above, we believe margins will expand in 1Q18 RRHI shares worth US$346m (P18bn). In addition, DFI will from a windfall coming from price-protection measures. subscribe to an additional 6.1% stake in RRHI shares worth Retailers would have pre-loaded on inventories at lower prices US$174m. Both share sales are valued at P94 per RRHI share. prior to the expected price increase which will lead to better Post-transaction, DFI will effectively own an 18.25% stake in margins in 1Q18, likely to be a good quarter for grocery RRHI – a 12.15% stake will arise from the sale of RSCI, while retailers. However, we think margins, earnings growth and the remaining 6.1% stake will come from Gokongwei’s sale demand should moderate in the upcoming quarters as the of shares (which will be funded by DFI through internal cash pre-loading on cheaper inventories ease and consumers trade and bank borrowings). With the resulting exchange in equity, down on cheaper and lower-margin products. DFI will have rights to two board seats in RRHI, while Gokongwei’s stake will be reduced from 65% to 51% post- share sale and equity dilution. RRHI will take over 100% of RSCI’s operations by late 2018.
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Industry Focus ASEAN Grocery Retail
Return of inflation dampens consumer confidence cost-push impact of the TRAIN Law). Inflation should however moderate into FY19F once temporary shocks recede going Consumer confidence not strong. 2017 saw a weaker-than- forward. expected household consumption reading in 3Q17, mainly on spending moderation amid rising inflation. More accurately, Old but familiar: Return of inflation household spend capped 2017 with a 5.8% y-o-y growth, (%) 6.0 below its five-year average of 6.0%. The Bangko Sentral ng Pilipinas (BSP)’s quarterly Consumer Expectations Survey (CES) 5.0 reflects the same, and reports waning consumer confidence BSP Target: UB: 4% 4.0 and less upbeat outlook going forward as households start to 3.0 worry about higher prices of goods and consequently BSP Target: LB: 2% household spend, among other concerns, such as peace and 2.0 order, calamities, poor health and high medical expenses. 1.0
0.0 Household consumption falling behind 5-year average -1.0 (%) 8.0
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17
7.0 Source: Bangko Sentral ng Pilipinas (BSP), Philippine Statistics Authority Five year average: 6.0% 6.0 Maintain HOLD for both RRHI and PGOLD 5.0 Puregold Price Club (PGOLD PH, UNDER REVIEW). FY17 4.0 headline results were within estimates. Challenges
3.0 nonetheless remain for the Puregold, including rising inflation, higher wages, competition, and start-up losses from new 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Household Consumption GDP stores. S&R segment faces competition (from Landers), peso Source: Philippine Statistics Authority weakness from high exposure to imported products (70%), and rising OPEX from start-up losses from new stores. These Weakening consumer sentiment going forward will continue to put pressure on its margins and earnings.
50.0 Rating, TP and earnings are under review. CES: Outlook for Current Quarter CES: Outlook for Next Three Months 40.0 CES: Outlook for Next Twelve Months Robinsons Retail Holdings Inc. (RRHI PM, HOLD, TP: P87.00). 30.0 We cut earnings by 7%/10% for FY18F/19F as we consolidate 20.0 the acquisition of the loss-making Rustan Supercenter Inc.
10.0 from Dairy Farm and the earnings dilution in the same deal that will issue new shares to Dairy Farm. We view the deal to 0.0 be negative in the near-to-medium term but constructive in -10.0 the long term. We expect positive impact on RRHI’s earnings -20.0 to be felt the earliest in FY20F. This acquisition is significant -30.0 relative to the previous acquisition as it entails exposure to the higher-end market segment especially in metro Manila,
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Source: Bangko Sentral ng Pilipinas although it is not a game changer. In addition, we adjust our estimates to reflect earnings pressure stemming from the Inflation to accelerate. Average annual inflation for 2017 was increasing competition in the retail mall space. Our TP of P87 at 3.2%, 1.4ppts higher than 2016 and slightly above the is based on SOTP valuation methodology and implies 25x/22x midpoint of BSP’s 2-4% inflation target. Our DBS economist’s FY18F/19F PE – in line with regional peer average. revised inflation forecast (2006=100) expects increase in prices to tread higher at 4.5% in FY18F, before normalising to 3.6% in FY19F. We share BSP’s view that near-term risks to inflation lean more on the upside (especially amid transitory
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Industry Focus ASEAN Grocery Retail
COMPANY GUIDES
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Thailand Company Guide CP ALL
Version 9 | Bloomberg: CPALL TB | Reuters: CPALL.BK Refer to important disclosures at the end of this report
DBS Group Research . Equity 26 Jan 2018
BUY Beneficiary of rising consumer confidence Last Traded Price ( 25 Jan 2018): Bt80.00 (SET : 1,819.29) Price Target 12-mth: Bt95.00 (19% upside) (Prev Bt84.00) Expect another record high in 4Q17F. While 4Q17F revenue would grow decently from positive SSSG and store expansion, Analyst we project earnings growth to outpace revenue growth, Namida Artispong +66 2857 7833 [email protected] mainly from gross profit margin expansion at both CVS and
MAKRO businesses. An increase in gross profit margin at CVS What’s New should stem from higher product mix of higher-margin products like personal care and ready-to-eat products while • Expect 4Q17F earnings to hit a record high, growing by lower sales of low-margin products such as alcohol and 19% y-o-y cigarettes were the key reasons behind MAKRO’s higher • SSSG has remained firmly in positive territory margin. Overall, we estimate CPALL’s 4Q17E earnings to rise • Profitability to remain strong in FY18F with projected 18.7% y-o-y and 2.7% q-o-q to Bt5.1bn. earnings growth of 18% Profitability to stay strong in FY18F. CPALL will benefit from the recovery of domestic consumption and rising purchasing power as it sells mainly consumer products. This would further Price Relative support SSSG in both CVS and cash-and-carry businesses. Bt Relative Index Meanwhile, CPALL still targets to open at least 700 7-Eleven 83.8 212 192 stores p.a. Despite its plans to add new stores, the spotlight 73.8 172
63.8 152 remains on lifting margins by increasing the mix of high-
132 53.8 112 margin products (health and beauty) and controlling expenses. 43.8 92 FY18F profit is projected to rise 18.1% y-o-y to Bt23bn. 33.8 72 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Where we differ? We believe its current valuation is CP ALL (LHS) Relative SET (RHS) undemanding given its defensive nature, business resilience, Forecasts and Valuation FY Dec (Bt m) 2016A 2017F 2018F 2019F visible expansion plan, market leadership, and high ROE. Revenue 434,712 473,594 520,177 567,299 EBITDA 36,473 40,687 45,257 49,889 Potential catalyst. A pick-up in domestic consumer spending. Pre-tax Profit 20,142 23,466 27,923 32,678 The spending is likely to improve onwards which will benefit all Net Profit 16,677 19,486 23,006 26,610 Net Pft (Pre Ex.) 16,599 19,486 23,006 26,610 retailers including CPALL. Net Pft Gth (Pre-ex) (%) 21.3 17.4 18.1 15.7 EPS (Bt) 1.86 2.17 2.56 2.96 Valuation: EPS Pre Ex. (Bt) 1.85 2.17 2.56 2.96 We now use a terminal growth rate of 3% vs 2% previously in EPS Gth Pre Ex (%) 21 17 18 16 Diluted EPS (Bt) 1.86 2.17 2.56 2.96 view of the brighter domestic spending mood. Thus, our DCF- Net DPS (Bt) 0.90 1.08 1.28 1.48 based TP rises to Bt95.0, based on DCF valuation (WACC BV Per Share (Bt) 6.14 8.30 9.58 11.1 9.4%, terminal growth rate 3%). PE (X) 43.1 36.9 31.2 27.0 PE Pre Ex. (X) 43.3 36.9 31.2 27.0 P/Cash Flow (X) 18.9 20.8 18.2 16.3 Key Risks to Our View: EV/EBITDA (X) 24.1 21.2 18.9 16.9 Key risks are (i) delays in store expansion, (ii) weaker-than- Net Div Yield (%) 1.1 1.4 1.6 1.9 expected consumer confidence, and iii) intense competition. P/Book Value (X) 13.0 9.6 8.3 7.2 Net Debt/Equity (X) 2.6 1.8 1.4 1.1 At A Glance ROAE (%) 36.0 30.0 28.6 28.7 Issued Capital (m shrs) 8,983
Earnings Rev (%): 0 0 N/A Mkt. Cap (Btm/US$m) 718,648 / 22,839 Consensus EPS (Bt): 2.15 2.53 2.99 Major Shareholders (%) Other Broker Recs: B: 27 S: 0 H: 1 C.P. Merchandising (%) 30.5 Source of all data on this page: Company, DBSVTH, Bloomberg Finance Charoen Pokphand Group (%) 10.2 L.P Thai NDVR (%) 4.8 Free Float (%) 58.3 3m Avg. Daily Val (US$m) 34.5 ICB Industry : Consumer Services / Food & Drug Retailers
Page 20 ed: CK / sa: PY, CS Company Guide CP ALL
WHAT’S NEW Profitability to remain strong
Another record high in 4Q17F. SSSG for both convenient Profitability to stay strong in FY18F. CPALL will benefit from store (CVS) and cash-and-carry businesses should remain the recovery of domestic consumption and rising purchasing healthy with a positive figure in 4Q17F. We estimate CVS’ power as it sells mainly consumer products. This would SSSG to be strong at +4% in 4Q17F (vs -0.4% in 4Q16 and further support SSSG in both CVS and cash-and-carry +2.4% in 3Q17), thanks to the success of its stamp businesses. Meanwhile, CPALL still targets to open at least promotion, the low base, and better domestic consumption. 700 7-Eleven stores p.a. Despite its plans to add new stores, Meanwhile, MAKRO should report SSSG of +2.5% (vs +3.9% the spotlight remains on lifting margins by increasing the mix in 4Q16 and +2.2% in 3Q17) from positive growth of fresh of high-margin products (health and beauty) and controlling food and non-food items. In terms of store expansion, almost expenses. FY18F profit is projected to rise 18.1% y-o-y to 100 7-Eleven stores (on track to meet its target of adding Bt23bn. 700 stores p.a.) and three MAKRO stores were expected to Maintain BUY with higher TP. We now use a terminal growth be opened in the quarter. rate of 3% vs 2% previously in view of the brighter domestic While 4Q17F revenue would grow decently from positive spending mood. Thus, our DCF-based TP rises to Bt95.0. We SSSG and store expansion, we project earnings growth to remain positive on CPALL given its defensive nature, business outpace revenue growth, mainly from gross profit margin resilience, visible expansion plan, market leadership, and high expansion at both CVS and MAKRO businesses. A rise in ROE of 29x. gross profit margin at CVS should stem from a higher product mix of higher-margin products like personal care and ready- to-eat products while lower sales of low-margin products such as alcohol and cigarettes were the key reasons behind MAKRO’s higher margin. Overall, we estimate CPALL’s 4Q17E profit to rise 18.7% y-o-y and 2.7% q-o-q to Bt5.1bn. CPALL: Quarterly SSSG
8.0% 6.3% 6.0% 5.0% 4.4% 4.0% 3.9% 4.0% 5.0% 2.8% 2.6% 2.4% 2.4% 1.6% 2.0% 1.1% 1.2% 1.2% 2.5% 0.3% 2.2% 0.3% -0.4% 0.0% -1.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17F -0.7% -2.0% -0.9% -1.4%
-4.0% -3.7%
-6.0%
CPALL MAKRO
Source: Company, DBS Vickers
Page 21 Company Guide CP ALL
CPALL: 4Q17F earnings preview FY Dec (Btm) 4Q16 3Q17 4Q17F
Revenue 111,103 118,242 125,890 COGS (86,800) (91,742) (97,759) Gross Profit 24,303 26,500 28,131 SG&A (21,513) (23,624) (24,600) Other opt. Inc. 4,336 4,924 4,951 Opt. Profit 7,126 7,799 8,482 Non-opt. Inc./Exp. 0 0 0 Int. Inc. 75 45 67 EBIT 7,202 7,844 8,550 Int. Exp. (2,131) (2,000) (2,243) Extra Gain/(Loss) (17) 5 9 Pretax Profit 5,053 5,848 6,316 Tax (714) (853) (1,155) MI (38) (25) (58) Net Profit 4,301 4,970 5,103 Norm Profit 4,318 4,966 5,094 EPS 0.48 0.55 0.57
Gross Margin 21.9% 22.4% 22.3% SGA % Sales (19.4%) (20.0%) (19.5%) EBIT Margin 6.5% 6.6% 6.8% Net Margin 3.9% 4.2% 4.1% Eff. Tax Rate % (14.1%) (14.6%) (18.3%)
Source of all data: Company, DBSVTH
Page 22 Company Guide CP ALL
Same-store-sales (%) CRITICAL DATA POINTS TO WATCH 3.2 3.2 3 Critical Factors 2.8 2.4 Aggressive outlet expansion. As at end-3Q17, CPALL had a 2.3 total of 10,152 outlets nationwide, with 44% in Bangkok and 1.8 suburban areas, and the remaining in provincial regions. Despite 1.4 1.3 0.9 the slow domestic economy recovery, CPALL will continue to 0.9 aggressively expand its network. It targets to add at least 700 0.5 outlets p.a. and has a target to reach 13,000 stores by 2021. Of 0.0 the total additional 700 stores p.a., 90% of the new stores 2015A 2016A 2017F 2018F 2019F would be standalone ones while another 10% will be located at Spending per ticket (Bt) PTT gas stations. Furthermore, more than half of the new 68.2 69.6 65.5 66.9 outlets would be in provincial areas as there is ample potential 63 64.3 demand, thanks to a much higher population catchment per 55.6 store compared to Bangkok. 41.7
Resilient SSSG. Amid weak consumption sentiment, Thai 27.8 consumers are now more cautious and are spending on smaller- ticket items and making more frequent shopping trips. This 13.9 trend is favourable for convenience store and mini-supermarket 0.0 formats. CPALL has been delivering relatively stronger SSSG, 2015A 2016A 2017F 2018F 2019F outperforming other retailers that have mostly registered Customers/store/day negative growth. As c.71% of its product mix is generated from 1312.14 1261 1267 1274 1280 1286 food (ready-to-eat meals, processed foods, bakery, snacks, beverages, etc.) which is a staple, we expect CPALL’s operations 1049.71 and SSSG to be resilient. As domestic consumption is recovering 787.28 and purchasing power is rising, CPALL will benefit from this as it sells mainly consumer products. 524.86
262.43 Solid gross margin. We expect economies of scale from outlet expansion and larger contribution from higher-margin products 0.00 to support CPALL’s margins. With a larger network, CPALL will 2015A 2016A 2017F 2018F 2019F be leveraging its high bargaining power on supply contracts. New Stores
The group will continue to add high-margin product lines like 705 710 700 700 700 ready-to-eat meals and from the health and beauty category, which yield higher margins than other products. 573.7
430.3 Lower financing expenses. CPALL has refinanced its loans by issuing debentures to replace high-cost bank loans. Additionally, 286.8
CPALL continues to issue subordinated perpetual debentures 143.4 which are classified as equity and would strengthen its balance 0.0 sheet. 2015A 2016A 2017F 2018F 2019F
Total stores at year end
11642 10942 10242 9542 9406.7 8832
7055.1
4703.4
2351.7
0.0 2015A 2016A 2017F 2018F 2019F Source: Company, DBSVTH
Page 23 Company Guide CP ALL
Leverage & Asset Turnover (x) Balance Sheet: 1.5 4.50 Expect gearing to decline. Following the MAKRO acquisition, 4.00 1.5 CPALL’s net gearing surged to 4.9x in FY13. Nonetheless, its net 3.50 1.4 gearing dropped to 2.3x as at end-3Q17, thanks to the nature 3.00 1.4 2.50 of its business – being cash-generative and providing decent 1.3 2.00 1.3 free cashflow. 1.50 1.2 1.00 Share Price Drivers: 0.50 1.2 0.00 1.1 A pick-up in domestic consumer spending. The spending is 2015A 2016A 2017F 2018F 2019F likely to improve onwards which will benefit all retailers Gross Debt to Equity (LHS) Asset Turnover (RHS) including CPALL. Capital Expenditure Btm Key Risks: 19,500.0 19,000.0 Weak consumer confidence. CPALL’s business may suffer if 18,500.0 consumer confidence (as measured by the Consumer 18,000.0 17,500.0 Confidence Index) in Thailand weakens because of an 17,000.0 economic slowdown or domestic political unrest. In any case, 16,500.0 16,000.0 CPALL tends to adjust its product mix in response to changing 15,500.0 economic conditions. 15,000.0 14,500.0 2015A 2016A 2017F 2018F 2019F Unfavourable weather conditions. Customer traffic at CPALL’s Capital Expenditure (-) stores mostly involves walk-ins. Unfavourable weather ROE (%) conditions could deter walk-in customers. CPALL normally 40.0% registers softer sales during the rainy season. 35.0%
30.0%
Company Background 25.0%
CP ALL PCL was established in 1988 and is a flagship company 20.0% of Charoen Pokphand Group’s marketing and distribution 15.0% business. It is the leading operator of convenience store chains 10.0%
(7-Eleven) in Thailand with the highest market share. 5.0%
Additionally, it also operates other related businesses such as 0.0% bill payment collection service, manufacturing and sales of 2015A 2016A 2017F 2018F 2019F frozen foods and bakery, etc. Forward PE Band (x) (x)
38.7
+2sd: 35.5x 33.7 +1sd: 31.9x
28.7 Avg: 28.2x
-1sd: 24.5x 23.7
-2sd: 20.9x 18.7 Jan-14 Jan-15 Jan-16 Jan-17
PB Band (x) (x) 15.6
14.6 +2sd: 14.46x 13.6
12.6 +1sd: 12.71x
11.6
10.6 Avg: 10.95x
9.6 -1sd: 9.2x 8.6
7.6 -2sd: 7.44x 6.6 Jan-14 Jan-15 Jan-16 Jan-17 Source: Company, DBSVTH
Page 24 Company Guide CP ALL
Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Same-store-sales (%) 0.90 2.40 1.30 3.20 3.00 Spending per ticket (Bt) 63.0 64.3 65.6 66.9 68.2 Customers/store/day 1,261 1,267 1,274 1,280 1,286 New Stores 705 710 700 700 700 Total stores at year end 8,832 9,542 10,242 10,942 11,642
Income Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 391,817 434,712 473,594 520,177 567,299 Cost of Goods Sold (306,519) (339,688) (368,268) (403,212) (438,681) Gross Profit 85,299 95,024 105,326 116,965 128,619 Other Opng (Exp)/Inc (60,030) (66,746) (73,813) (81,686) (89,583) Operating Profit 25,269 28,278 31,512 35,279 39,036 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (8,381) (8,213) (8,046) (7,356) (6,358) Exceptional Gain/(Loss) (4.2) 77.1 0.0 0.0 0.0 Pre-tax Profit 16,884 20,142 23,466 27,923 32,678 Tax (3,066) (3,323) (3,825) (4,747) (5,882) Minority Interest (135) (143) (155) (171) (186) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 13,682 16,677 19,486 23,006 26,610 Net Profit before Except. 13,687 16,599 19,486 23,006 26,610 EBITDA 32,554 36,473 40,687 45,257 49,889 Growth Revenue Gth (%) 9.5 10.9 8.9 9.8 9.1 EBITDA Gth (%) 21.5 12.0 11.6 11.2 10.2 Opg Profit Gth (%) 23.3 11.9 11.4 12.0 10.6 Net Profit Gth (Pre-ex) (%) 39.3 21.3 17.4 18.1 15.7 Margins & Ratio Gross Margins (%) 21.8 21.9 22.2 22.5 22.7 Opg Profit Margin (%) 6.4 6.5 6.7 6.8 6.9 Net Profit Margin (%) 3.5 3.8 4.1 4.4 4.7 ROAE (%) 40.2 36.0 30.0 28.6 28.7 ROA (%) 4.2 4.9 5.4 6.2 7.0 ROCE (%) 8.2 9.1 9.6 10.4 11.4 Div Payout Ratio (%) 52.5 48.5 50.0 50.0 50.0 Net Interest Cover (x) 3.0 3.4 3.9 4.8 6.1 Source: Company, DBSVTH
Page 25 Company Guide CP ALL
Quarterly / Interim Income Statement (Btm) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Revenue 108,642 111,103 113,329 116,134 118,242 Cost of Goods Sold (84,600) (86,800) (88,434) (90,333) (91,742) Gross Profit 24,042 24,303 24,894 25,801 26,500 Other Oper. (Exp)/Inc (16,985) (17,177) (17,184) (18,280) (18,701) Operating Profit 7,057 7,126 7,710 7,521 7,799 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (2,100) (2,056) (1,956) (1,960) (1,955) Exceptional Gain/(Loss) 28.1 (17.3) 5.04 (18.4) 4.55 Pre-tax Profit 4,985 5,053 5,759 5,542 5,848 Tax (832) (714) (951) (866) (853) Minority Interest (38.0) (37.6) (43.3) (29.0) (25.0) Net Profit 4,115 4,301 4,765 4,647 4,970 Net profit bef Except. 4,087 4,318 4,760 4,666 4,966 EBITDA 8,997 8,525 9,997 9,885 10,086
Growth Revenue Gth (%) (1.2) 2.3 2.0 2.5 1.8 EBITDA Gth (%) (1.4) (5.3) 17.3 (1.1) 2.0 Opg Profit Gth (%) (0.4) 1.0 8.2 (2.5) 3.7 Net Profit Gth (Pre-ex) (%) (2.4) 5.7 10.2 (2.0) 6.4 Margins Gross Margins (%) 22.1 21.9 22.0 22.2 22.4 Opg Profit Margins (%) 6.5 6.4 6.8 6.5 6.6 Net Profit Margins (%) 3.8 3.9 4.2 4.0 4.2
Balance Sheet (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 89,447 99,127 106,735 113,472 119,338 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 182,663 183,242 183,156 183,074 182,998 Cash & ST Invts 22,921 34,819 36,920 40,443 32,430 Inventory 25,072 26,705 30,784 33,812 36,874 Debtors 854 1,026 1,118 1,228 1,339 Other Current Assets 8,126 7,349 8,084 8,893 9,782 Total Assets 329,083 352,268 366,796 380,921 382,761
ST Debt 23,803 31,554 25,449 27,799 23,454 Creditor 62,624 66,959 72,593 79,481 86,472 Other Current Liab 14,705 15,305 16,783 18,405 20,187 LT Debt 165,684 157,552 151,619 143,336 127,398 Other LT Liabilities 20,593 21,295 21,295 21,295 21,295 Shareholder’s Equity 37,349 55,196 74,607 86,110 99,415 Minority Interests 4,326 4,407 4,451 4,496 4,541 Total Cap. & Liab. 329,083 352,268 366,796 380,921 382,761
Non-Cash Wkg. Capital (43,276) (47,184) (49,389) (53,953) (58,663) Net Cash/(Debt) (166,566) (154,287) (140,148) (130,692) (118,422) Debtors Turn (avg days) 0.8 0.8 0.8 0.8 0.8 Creditors Turn (avg days) 74.4 71.3 70.9 70.6 70.8 Inventory Turn (avg days) 28.8 28.5 29.2 30.0 30.2 Asset Turnover (x) 1.2 1.3 1.3 1.4 1.5 Current Ratio (x) 0.6 0.6 0.7 0.7 0.6 Quick Ratio (x) 0.2 0.3 0.3 0.3 0.3 Net Debt/Equity (X) 4.0 2.6 1.8 1.4 1.1 Net Debt/Equity ex MI (X) 4.5 2.8 1.9 1.5 1.2 Capex to Debt (%) 10.0 8.6 9.3 9.6 10.9 Z-Score (X) 2.8 2.9 3.1 3.1 3.2
Source: Company, DBSVTH
Page 26 Company Guide CP ALL
Cash Flow Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 16,884 20,142 23,466 27,923 32,678 Dep. & Amort. 7,285 8,195 9,175 9,978 10,853 Tax Paid (3,066) (3,322) (3,824) (4,746) (5,881) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 5,065 8,060 2,152 4,508 4,651 Other Operating CF 0.0 0.0 0.0 0.0 0.0 Net Operating CF 31,419 37,939 34,508 39,570 44,169 Capital Exp.(net) (19,010) (16,263) (16,450) (16,450) (16,450) Other Invts.(net) (68.3) 27.4 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1,669 (2,559) (2,610) (2,662) (2,715) Net Investing CF (17,409) (18,794) (19,060) (19,112) (19,165) Div Paid (7,186) (8,085) (9,447) (11,153) (12,901) Chg in Gross Debt (9,177) (779) (12,038) (5,933) (20,283) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (8,416) 1,631 8,000 0.0 0.0 Net Financing CF (24,780) (7,233) (13,485) (17,087) (33,183) Currency Adjustments 83.9 12.5 0.0 0.0 0.0 Chg in Cash (10,686) 11,925 1,963 3,371 (8,179) Opg CFPS (Bt) 2.93 3.33 3.60 3.90 4.40 Free CFPS (Bt) 1.38 2.41 2.01 2.57 3.08 Source: Company, DBSVTH
Target Price & Ratings History
Bt 12-mth Date of Closing 80.57 S.No. T arget Rating Report Price Price 1: 24 Feb 17 59.75 75.00 BUY 75.57 2: 04 May 17 61.25 75.00 BUY
3: 12 May 17 64.50 75.00 BUY 70.57 4: 18 Jul 17 61.00 75.00 BUY 5: 24 Jul 17 60.75 75.00 BUY 6: 11 Aug 17 61.75 75.00 BUY 65.57 7: 20 Oct 17 69.25 84.00 BUY
8: 14 Nov 17 72.00 84.00 BUY 60.57
55.57 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18
Note : Share price and Target price are adjusted for corporate actions. Source: DBSVTH Analyst: Namida Artispong
THAI-CAC Declared Corporate Governance CG Rating (as of Jul 2017) n/a
THAI-CAC is Companies participating in Thailand's Private Sector Score Description Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC CAC) under Thai Institute of Directors (as of June 27, 2017) are Certified Companies certified by CAC. categorised into: Score Range Number of Logo Description Corporate Governance CG Rating is based on Thai Institute of 90-100 Excellent Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria 80-89 Very Good in five categories including board responsibilities (35% weighting), 70-79 Good disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass each company based on their scoring as follows: <50 No logo given N/A
Page 27 Company Guide CP ALL
DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 26 Jan 2018 06:20:10 (THA) Dissemination Date: 26 Jan 2018 06:25:06 (THA)
Sources for all charts and tables are DBSVTH unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH'').
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
Page 28 Company Guide CP ALL
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a proprietary position in CP ALL recommended in this report as of 29 Dec 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 29 Thailand Company Guide Berli Jucker Public Co. Ltd
Version 1 | Bloomberg: BJC TB | Reuters: BJC.BK Refer to important disclosures at the end of this report
DBS Group Research . Equity 22 Mar 2018
BUY Attractive earnings growth profile Last Traded Price ( 21 Mar 2018): Bt58.00 (SET : 1,801.43) Price Target 12-mth: Bt70.00 (21% upside) Solid growth traction for every business segment. Management expects group topline in 2018 to grow at a high single-digit pace Analyst in its all four business segments, except for the healthcare & Namida Artispong +66 2857 7833 [email protected] technical unit in which it expects double-digit revenue growth.
The profitability of its packaging business should be boosted by What’s New the new glass furnace which would enhance production efficiency • Expect solid growth in every business segment and allow BJC to produce all its glass products in-house. • New glass furnace should lift margins of packaging unit Meanwhile, improving domestic consumption would translate into higher sales for consumer products, a higher government budget • High backlog of galvanised steel orders would support for public health will drive BJC’s healthcare business segment and its technical supply chain the high backlog of galvanised steel orders will support its • Focus on merchandising strategy to tackle aggressive technical supply chain. Additionally, a lower effective tax rate competition in hypermarket space should be another earnings booster for this year.
Merchandising strategy to deal with intense competition in hypermarket space. Competition in modern retail should be more Price Relative
Bt Relative Index intense this year as the new CEO of Tesco Lotus Thailand CEO has
69.2 214 been very aggressive in terms of pricing strategy. Nevertheless, we 64.2 194 59.2 174 54.2 154 expect BJC’s modern retail unit to continue to deliver positive 49.2 134 44.2 114 SSSG in FY18F, supported by its merchandising strategy for fresh 39.2 94 34.2 29.2 74 food and home-line products and its plan to expand customer 24.2 54 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 base (especially corporate and HoReCa customers). Additionally, Berli Jucker Public Co. Ltd (LHS) Relative SET (RHS) BJC targets to add eight hypermarkets and 200 Mini Big C this year, as well as, store renovations (six extensions, four right-sizing, Forecasts and Valuation FY Dec (Btm) 2016A 2017A 2018F 2019F and three full renovations) which would increase rental space. Revenue 125,330 149,158 160,506 169,321 Where we differ? We believe its strong earnings growth profile EBITDA 15,714 20,201 22,165 23,643 this year justifies the current trading multiple of 1.2x PEG FY18F. Pre-tax Profit 5,517 8,235 9,463 10,590 Net Profit 3,307 5,211 6,725 7,580 Potential catalyst. i) Increasing glass production capacity. ii) Net Pft (Pre Ex.) 2,473 5,259 6,725 7,580 Improving domestic consumption. iii) Accelerating government Net Pft Gth (Pre-ex) (%) (8.0) 112.6 27.9 12.7 budget disbursement on healthcare. iv) Positive SSSG. v) EPS (Bt) 1.28 1.31 1.68 1.90 Continuous modern retail store expansion. vi) Potential of EPS Pre Ex. (Bt) 0.95 1.32 1.68 1.90 EPS Gth Pre Ex (%) (43) 38 28 13 expanding retail operations in ASEAN.
Diluted EPS (Bt) 1.27 1.30 1.68 1.89 Valuation: Net DPS (Bt) 0.50 0.57 0.84 0.95 BV Per Share (Bt) 39.6 26.7 27.8 28.9 Our DCF TP is based on 7.4% WACC and 3 % terminal PE (X) 45.5 44.4 34.4 30.5 growth rate. PE Pre Ex. (X) 60.8 44.0 34.4 30.5 P/Cash Flow (X) nm 17.5 15.1 14.2 Key Risks to Our View: EV/EBITDA (X) 19.6 19.2 17.4 16.2 i) Volatility in raw material prices. ii) Competition in the Net Div Yield (%) 0.9 1.0 1.5 1.6 business industry. iii) Economic risk. iv) Interest rate risk. P/Book Value (X) 1.5 2.2 2.1 2.0 Net Debt/Equity (X) 1.3 1.4 1.3 1.2 At A Glance ROAE (%) 5.5 5.0 6.2 6.7 Issued Capital (m shrs) 3,997
Earnings Rev (%): 0 0 0 Mkt. Cap (Btm/US$m) 231,841 / 7,442 Consensus EPS (Bt): N/A 1.69 1.97 Major Shareholders (%) Other Broker Recs: B: 13 S: 5 H: 6 TCC Corporation Co.Ltd (%) 64.58 Source of all data on this page: Company, DBSVTH, Bloomberg Finance UBS Ag Singapore Branch (%) 5.56 L.P DBS Bank Ltd (%) 4.32 Free Float (%) 25.1 3m Avg. Daily Val (US$m) 21.3 ICB Industry : Consumer Services / General Retailers
Page 30 ed: CK / sa: PY, CS Company Guide Berli Jucker Public Co. Ltd
WHAT’S NEW Promising FY18F earnings growth profile
Expect high single-digit sales growth. Management expects would translate into higher sales for consumer products (both group topline in 2018 to grow at a high single-digit pace in food and non-food) while increasing government’s budget on its all four business segments, except for the healthcare & public health will drive BJC’s healthcare business segment this technical unit in which it expects double-digit revenue year. Meanwhile, the high backlog of galvanised steel orders growth. Meanwhile, gross profit margin is also targeted to would support its technical supply chain. rise slightly, mainly from the glass packaging business. Competition in hypermarket segment would be more Additionally, a lower effective tax rate should be another aggressive this year. Tesco Lotus Thailand (Tesco TH) has its earnings booster for this year. first Thai new CEO this year and the new CEO has been very New glass furnace to enhance segment’s margin. Rising aggressive in terms of pricing strategy. Tesco TH launched its demand for glass packaging has been seen, especially from annual ‘Price Rollback’ campaign after Chinese New Year. food and beverage customers both in Thailand and in CLMV. This campaign is its biggest discount programme ever as it As a result, BJC’s current capacity is insufficient and some offers the deepest and widest discount in the company's 15 volumes of its glass packaging have to rely on outsourced years in Thailand, covering more than 1,000 items with production overseas by importing bottles. Nevertheless, the discounts of up to 40%. The discounts this year will also fourth new furnace with an additional capacity of 300 cover fresh food which is in contrast with its exclusive focus tons/day was completed in 4Q17, bringing its total glass on dry and non-food products in previous years. Additionally, production capacity to 3,035 tons/day as at end-2017. the campaign will be applied to all of Tesco TH’s formats Additionally, its fifth glass furnace which would add capacity from hypermarket to express stores and online platform. by 13.2% to 3,435 tons/day is expected to be completed by Expect positive retail SSSG. Despite more intense competition 3Q18. The new capacity would enhance production in the hypermarket space, we expect its modern retail unit to efficiency, allowing BJC to produce all its glass products in- continue to deliver positive SSSG in FY18F, supported by its house, and hence its profitability should also be boosted. merchandising strategy in fresh food and home-line products, BJC: Glass packaging production capacity and utilisation improving domestic consumption sentiment, and its plan to rate in Thailand expand customer base (especially corporate and HoReCa 4,000 90% customers). BIGC focuses on food quality and freshness to 89% 3,500 90% draw customer traffic while it also targets to level up its own 89% 3,000 private label sales of home-line products. The company 89% projects SSSG to be at mid-single-digit in FY18F (vs ours at 2,500 89% 3.5%). For the first two months of this year, SSSG is flat as 2,000 88% 3,434 88% Chinese New Year and Valentine’s Day were in the same 1,500 3,035 2,695 2,728 2,735 period this year and hence, it was like having only one event 88% 1,000 instead of two. 87% 500 Adding new retail outlets. BJC targets to add eight - 87% hypermarkets and 200 Mini Big C this year, as well as, store 2014 2015 2016 2017 2018F renovations (six extensions, four right-sizing, three full Capacity (tons/day)- LHS Utilisation rate- RHS renovations) which would increase rental space. The format Source: Company, DBSVTH of hypermarket to be opened this year will be mostly the 3K/4K model (3,000 to 4,000 sqm of sales area) while the expansion would be spread out throughout the year. Can packaging business may face some challenges. As CBG which is BJC’s third biggest client of aluminium can packaging after THBEV and Redbull, is building its own aluminium can packaging plant, BJC sales volume would be impacted from Sep 2018 onwards. However, sales volume from CBG in FY18F should still grow y-o-y and the impact should be limited as CBG accounts for 10% of company’s can sales or only 0.6% of group’s total sales. BJC has been looking for new customers to replace CBG. Solid sales growth momentum for consumer and healthcare & technical supply chains. Improving domestic consumption
Page 31 Company Guide Berli Jucker Public Co. Ltd
BJC: Modern retail store expansion plan Lower effective tax rate to boost FY18F earnings. BJC’s tax restructuring is expected to be completed in mid-2018 and Number of stores Operator thus the company will be able to utilise tax shield benefits from 2015 2016 2017 2018F the interest expenses of loans taken for the acquisition of BIGC BIG C Supercenter 110 116 125 133 and the tax benefits should be applied in 2H18. This would make the FY18F effective tax rate lower than 20% (vs 27.3% BIG C Extra 15 15 15 15 in FY17). BIG C Market 55 59 60 60 Mini BIG C 391 465 642 842
Source: Company, DBSVTH
Page 32 Company Guide Berli Jucker Public Co. Ltd
Revenue breakdown by segment CRITICAL DATA POINTS TO WATCH 120%
Critical Factors 100% 3% 4% 1% 0% 19% 17% Expansion of glass production capacity. Previously, BJC had 80% 65% 70% three furnaces in Thailand with a total capacity of 2,735 60% 39% 38% tons/day. Given insufficient production capacity, BJC has been 40% 6% importing some of its bottle parts from factories overseas such 5% 41% 13% as those from China and Turkey. Recently, the fourth new 20% 40% 11% 15% 13% furnace with an additional capacity of 300 tons/day was 0% 2014 2015 2016 2017 completed in 4Q17, bringing its total glass production capacity to 3,035 tons/day as at end-2017. The company plans to add Packaging Consumer products Healthcare & technical Modern retail Others another 400 tons/day by mid-2018 at its fifth furnace. The additional own capacity would enhance BJC’s operating margin Operating profit breakdown by segment as importing incurs higher operating costs. 120%
Improving domestic consumption and accelerating government 100% 14% 6% 24% budget disbursement on public health. We expect to see a more 80% 32% 17% 55% broad-based recovery in 2018. Strong growth in export and 60% tourism, accelerating infrastructure investment, a pick-up in 40% 7% private investment, expectation of a hike in the country’s 60% 58% 6% 20% minimum wage in April this year, and the upcoming general 26% 0% -2% -4% election in 1Q19 should serve as catalysts for domestic spending 2014 2015 2016 in 2018. Improving domestic consumption would translate into -20% Packaging Consumer products Healthcare & technical higher sales from consumer products and modern retail for BJC. Modern retail Others For healthcare business segment, the operations rely heavily on the government’s budget disbursement on public healthcare as Net margin by segment 70% of its customers are public hospitals. According to the 12.0% 11.1% 9.7% Ministry of Public Health, the government’s budget on public 10.0% 9.0% health is expected to increase by 4% and 12% in FY18F and 7.6% 8.0% 7.1% 7.1% 7.1% FY19F respectively. This should support sales at BJC’s healthcare 6.3% supply chain. 6.0% Positive retail SSSG and continuous outlet rollout. We expect 5.9% 5.9% 5.8% 4.0% the modern retail unit to continue to deliver positive SSSG, 4.8% 2.3% supported by its merchandising strategy in fresh food and 2.0% 3.4% home-line products and improving domestic consumption 1.0% 1.3% 0.0% sentiment. BIGC is now using fresh food to draw customer 2013 2014 2015 2016 traffic, by emphasising on food quality and freshness. Packaging Consumer products Healthcare & technical Modern retail Meanwhile, BIGC is using its home-line products to level up its own private label sales proportion in order to increase its gross Packaging revenue breakdown by product margin, as private labels yield a 300-bp higher margin than common brands. Additionally, we expect the company to Plastic, 2% expand its key retail formats; Hypermarket and Mini BIG C at the pace of eight and 200 outlets respectively in FY18F. Most of Aluminum can, the new stores will be outside Bangkok. 44% Glass, 54% Growing its retail empire in Vietnam. We expect BJC to resume its retail network expansion in ASEAN (particularly in Vietnam) soon with its owned channels like Mega Market (cash-and-carry store chain in Vietnam) and B’s Mart (the fourth largest convenience store chain in Vietnam). BJC will be able to leverage its retail expertise from BIGC to build and improve the businesses of its other retail chains in ASEAN. The potential of Modern retail revenue breakdown by product expanding retail operations in ASEAN should strengthen BJC’s Soft Home line, line, 8% long-term growth story and offer upside to our and street’s 9% Hard line, valuations. 15%
Fresh and dry food, 68%
Source: Company, DBSVTH
Page 33 Company Guide Berli Jucker Public Co. Ltd
Leverage & Asset Turnover (x) Balance Sheet: 1.0 Debt-to-equity stood at 1.4x in 2017. As BJC paid a hefty 1.40 0.9 premium for BIGC, whose business is much bigger than BJC's, 1.20 debt issuance and equity raising were inevitable in 2016. 1.00 0.8 Accordingly, BJC’s interest-bearing debt-to-equity had risen 0.80 0.7 0.60 from 0.9x in 2015 to 1.5x in 2016. However, BJC’s cash cycle 0.6 days have improved, thanks to the positive working capital of its 0.40 0.5 modern retail business while the consolidation of BIGC uplifted 0.20 0.00 0.4 BJC’s operating cash flows. 2015A 2016A 2017A 2018F 2019F Gross Debt to Equity (LHS) Asset Turnover (RHS) Share Price Drivers: Capital Expenditure i) Increasing glass production capacity. ii) Improving domestic Btm consumption. iii) Accelerating government budget disbursement 60,000.0 on healthcare. iv) Positive SSSG. v) Continuous modern retail 50,000.0 store expansion. vi) Potential of expanding retail operations in 40,000.0
ASEAN. 30,000.0
20,000.0
10,000.0 Key Risks: 0.0 Volatility in raw material prices. Raw materials like glass, 2015A 2016A 2017A 2018F 2019F aluminium, sheet, etc. account for the largest part in production Capital Expenditure (-) costs. The fluctuations in the supply costs would have an ROE (%) imperative impact on the company’s gross profit margins. 16.0% Competition in the business industry. Competition in consumer 14.0% 12.0% products and modern retail businesses is strong. Nevertheless, 10.0% competition in packaging and healthcare & technical operations 8.0% is less fierce due to high barriers to entry. 6.0%
4.0%
2.0%
Economic risk. BJC’s businesses can be weakened if the 0.0% economy deteriorates, which will then dampen consumption 2015A 2016A 2017A 2018F 2019F expenditure. Forward PE Band (x) (x)
43.4 Interest rate risk. BJC’s financial position has been dampened +2sd: 41.6x following its BIGC acquisition in 2016. As at end-2016, its 38.4 interest-bearing debt-to-equity stood at 1.5x. Any rising trend +1sd: 36.3x 33.4 of interest rate would weigh on its debt burden. Avg: 31x 28.4 -1sd: 25.7x Company Background 23.4 BJC was founded in 1882 and has over 135 years of business -2sd: 20.4x 18.4 heritage. It is a trader and manufacturer of consumer products Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 under the TCC Group with exposure in Thailand and ASEAN, PB Band (x) particularly in Vietnam and Laos. BJC’s major businesses include (x) packaging, consumer products, healthcare and technical 6.1 products/services, and most recently modern retail operations. 5.1 +2sd: 5.04x As there is low correlation among each business unit, its 4.1 diversified business portfolio should generate more stable +1sd: 3.83x 3.1 operations and earnings. Meanwhile, a strong business platform Avg: 2.62x with TCC Group has helped BJC to strengthen the distribution 2.1 -1sd: 1.41x network of its consumer product segment. 1.1
0.1 -2sd: 0.2x Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: Company, DBSVTH
Page 34 Company Guide Berli Jucker Public Co. Ltd
Income Statement (Btm) FY Dec 2015A 2016A 2017A 2018F 2019F Revenue 42,893 125,330 149,158 160,506 169,321 Cost of Goods Sold (33,071) (102,735) (120,706) (129,208) (135,967) Gross Profit 9,822 22,595 28,452 31,298 33,355 Other Opng (Exp)/Inc (5,701) (13,158) (15,664) (17,292) (18,234) Operating Profit 4,121 9,437 12,787 14,007 15,120 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 87.1 181 24.1 26.5 29.2 Net Interest (Exp)/Inc (471) (5,165) (4,510) (4,571) (4,560) Exceptional Gain/(Loss) 116 1,064 (66.6) 0.0 0.0 Pre-tax Profit 3,853 5,517 8,235 9,463 10,590 Tax (400) (1,196) (2,260) (1,887) (2,112) Minority Interest (661) (1,015) (764) (851) (897) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,792 3,307 5,211 6,725 7,580 Net Profit before Except. 2,688 2,473 5,259 6,725 7,580 EBITDA 6,350 15,714 20,201 22,165 23,643 Growth Revenue Gth (%) 2.9 192.2 19.0 7.6 5.5 EBITDA Gth (%) 28.2 147.5 28.6 9.7 6.7 Opg Profit Gth (%) 37.5 129.0 35.5 9.5 8.0 Net Profit Gth (Pre-ex) (%) 61.0 (8.0) 112.6 27.9 12.7 Margins & Ratio Gross Margins (%) 22.9 18.0 19.1 19.5 19.7 Opg Profit Margin (%) 9.6 7.5 8.6 8.7 8.9 Net Profit Margin (%) 6.5 2.6 3.5 4.2 4.5 ROAE (%) 17.4 5.5 5.0 6.2 6.7 ROA (%) 6.3 1.9 1.7 2.1 2.4 ROCE (%) 10.9 5.0 3.5 4.2 4.5 Div Payout Ratio (%) 47.9 39.2 43.7 50.0 50.0 Net Interest Cover (x) 8.7 1.8 2.8 3.1 3.3 Source: Company, DBSVTH
Page 35 Company Guide Berli Jucker Public Co. Ltd
Quarterly / Interim Income Statement (Btm) FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 36,645 35,677 37,107 37,067 39,307 Cost of Goods Sold (30,423) (29,075) (30,328) (29,799) (31,505) Gross Profit 6,222 6,602 6,779 7,268 7,802 Other Oper. (Exp)/Inc (3,892) (3,807) (3,851) (4,005) (4,001) Operating Profit 2,330 2,795 2,928 3,263 3,801 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 27.3 23.9 (6.9) 6.64 0.40 Net Interest (Exp)/Inc (1,161) (1,121) (1,108) (1,112) (1,169) Exceptional Gain/(Loss) 36.6 (51.4) (0.8) 8.80 (23.3) Pre-tax Profit 1,233 1,647 1,813 2,166 2,609 Tax (7.7) (531) (595) (576) (558) Minority Interest (188) (151) (222) (203) (188) Net Profit 1,037 965 996 1,387 1,863 Net profit bef Except. 1,001 1,000 996 1,380 1,882 EBITDA 4,189 4,610 4,731 5,169 5,731
Growth Revenue Gth (%) 9.5 (2.6) 4.0 (0.1) 6.0 EBITDA Gth (%) (7.8) 10.1 2.6 9.3 10.9 Opg Profit Gth (%) (13.3) 20.0 4.7 11.4 16.5 Net Profit Gth (Pre-ex) (%) 70.5 (0.1) (0.3) 38.5 36.3 Margins Gross Margins (%) 17.0 18.5 18.3 19.6 19.8 Opg Profit Margins (%) 6.4 7.8 7.9 8.8 9.7 Net Profit Margins (%) 2.8 2.7 2.7 3.7 4.7
Balance Sheet (Btm) FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 18,589 62,399 66,354 68,223 69,229 Invts in Associates & JVs 3,533 34,537 35,198 35,225 35,253 Other LT Assets 4,198 175,772 174,965 174,965 174,965 Cash & ST Invts 1,130 3,486 4,368 1,956 4,527 Inventory 7,244 19,882 19,132 20,442 21,522 Debtors 9,771 12,548 13,831 15,211 16,666 Other Current Assets 236 76.6 1,212 1,304 1,376 Total Assets 44,701 308,701 315,059 317,325 323,538
ST Debt 7,521 20,646 17,154 17,122 17,023 Creditor 7,554 30,487 31,388 33,538 35,309 Other Current Liab 238 719 1,712 1,842 1,943 LT Debt 7,454 131,362 139,528 134,168 133,116 Other LT Liabilities 1,183 14,340 14,104 14,245 14,387 Shareholder’s Equity 17,063 102,737 106,514 110,901 115,352 Minority Interests 3,688 8,412 4,659 5,510 6,407 Total Cap. & Liab. 44,701 308,701 315,059 317,325 323,538
Non-Cash Wkg. Capital 9,458 1,302 1,074 1,577 2,311 Net Cash/(Debt) (13,845) (148,522) (152,314) (149,333) (145,612) Debtors Turn (avg days) 80.7 32.5 32.3 33.0 34.4 Creditors Turn (avg days) 74.9 63.2 87.5 85.6 86.2 Inventory Turn (avg days) 80.9 48.2 59.0 55.9 56.3 sset Turnover (x) 1.0 0.7 0.5 0.5 0.5 Current Ratio (x) 1.2 0.7 0.8 0.7 0.8 Quick Ratio (x) 0.7 0.3 0.4 0.4 0.4 Net Debt/Equity (X) 0.7 1.3 1.4 1.3 1.2 Net Debt/Equity ex MI (X) 0.8 1.4 1.4 1.3 1.3 Capex to Debt (%) 18.0 32.8 7.2 6.6 6.3 Z-Score (X) 0.0 0.0 0.0 0.0 0.0
Source: Company, DBSVTH
Page 36 Company Guide Berli Jucker Public Co. Ltd
Cash Flow Statement (Btm) FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 3,853 5,517 8,235 9,463 10,590 Dep. & Amort. 2,141 6,096 7,389 8,131 8,494 Tax Paid (495) (2,231) (3,163) (2,804) (3,025) Assoc. & JV Inc/(loss) (87.1) (181) (24.1) (26.5) (29.2) Chg in Wkg.Cap. (841) 8,156 228 (503) (734) Other Operating CF (15.5) (189,565) 531 1,057 1,056 Net Operating CF 4,556 (172,208) 13,196 15,318 16,351 Capital Exp.(net) (2,689) (49,905) (11,345) (10,000) (9,500) Other Invts.(net) 0.13 (296) (373) 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (0.1) 296 373 0.0 0.0 Net Investing CF (2,689) (49,905) (11,345) (10,000) (9,500) Div Paid (955) (1,091) (1,584) (3,022) (3,534) Chg in Gross Debt (1,257) 137,032 4,674 (5,393) (1,150) Capital Issues 0.0 83,490 314 685 404 Other Financing CF 236 3,974 (4,307) 0.0 0.0 Net Financing CF (1,977) 223,405 (903) (7,730) (4,280) Currency Adjustments 116 1,064 (66.6) 0.0 0.0 Chg in Cash 6.96 2,356 882 (2,411) 2,571 Opg CFPS (Bt) 3.39 (69.6) 3.25 3.96 4.28 Free CFPS (Bt) 1.17 (85.7) 0.46 1.33 1.72 Source: Company, DBSVTH
Target Price & Ratings History
Bt 12-mth Date of Closing 65.13 S.No. T arget Rating Report Price Price 1: 08 Mar 18 59.25 70.00 BUY 60.13
55.13
50.13
45.13
40.13 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18
Note : Share price and Target price are adjusted for corporate actions. Source: DBSVTH Analyst: Namida Artispong
THAI-CAC Declared Corporate Governance CG Rating (as of Oct 2017)
THAI-CAC is Companies participating in Thailand's Private Sector Score Description Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC CAC) under Thai Institute of Directors (as of Feb 2018) are Certified Companies certified by CAC. categorised into: Score Range Number of Logo Description Corporate Governance CG Rating is based on Thai Institute of 90-100 Excellent Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria 80-89 Very Good in five categories including board responsibilities (35% weighting), 70-79 Good disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass each company based on their scoring as follows: <50 No logo given N/A
Page 37 Company Guide Berli Jucker Public Co. Ltd
DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 22 Mar 2018 06:19:27 (THA) Dissemination Date: 22 Mar 2018 06:29:17 (THA)
Sources for all charts and tables are DBSVTH unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH'').
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
Page 9 Page 38 Company Guide Berli Jucker Public Co. Ltd
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or 2 his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 28 Feb 2018. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 39 Singapore Company Guide Dairy Farm
Version 8 | Bloomberg: DFI SP | Reuters: DAIR.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 28 Mar 2018
BUY Positive on Rustan spin-off Last Traded Price ( 27 Mar 2018): US$8.00 (STI : 3,439.35) Price Target 12-mth: US$9.77 (22% upside) (Prev US$9.54) Reiterate BUY, more positive on partnership deal with RRHI. We turn more positive on DFI’s recent deal with Robinson’s Retail Analyst Holdings Inc. (RRHI) to spin off Rustan Supercenter Inc. for an Alfie YEO +65 6682 3717 [email protected] 18% stake in RRHI. We assess that the deal will add US$0.23 to Andy SIM, CFA +65 6682 3718 [email protected] our TP, raising it to US$9.77. We see the 18% stake in RRHI
translating into an immediate net value for DFI as Rustan is still What’s New loss making, and hence swapping a loss-making business into Positive on DFI’s spin-off of Rustan Supercenter Inc. to shares of RRHI would present upside to both earnings and TP. Robinson Retail Holdings Inc. (RRHI) Current share price ex-Yonghui and RRHI values DFI’s core business at just 16x forward PE, below the regional peers’ Earnings raised by marginal 2-3% to account for stake average and its 9-year historical average forward PE of 24x. in RRHI We assess value of RRHI deal to be worth an additional Where we differ: We are positive that the new CEO Ian McLeod c.US$0.23 to our TP net of debt financing and his initiatives to improve performances of the stores will pay off over the next few years. Already, more emphasis is being Maintain BUY; TP raised to US$9.77 placed on store operations on a more detailed basis from
merchandising to display, sourcing, pricing space management, cost management, etc. He also has a track record of turning Price Relative around Coles in Australia. US$ Relative Index 12.0 219 11.0 199 Potential catalyst: We see earnings turnaround going forward as 10.0 179 159 9.0 a stock catalyst and swapping Rustan for RRHI shares is part of 139 8.0 119 this process. We believe successful implementation of strategies 7.0 99 6.0 79 by new CEO Ian McLeod will be key to earnings recovery. 5.0 59 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Dairy Farm (LHS) Relative STI (RHS) Valuation: Forecasts and Valuation SOTP valuation methodology. Our target price of US$9.77 is FY Dec (US$ m) 2016A 2017A 2018F 2019F derived from sum-of-parts valuation methodology. We value Revenue 11,201 11,289 11,440 11,691 DFI's core business at US$7.72 based on DCF, 20% and 18% EBITDA 784 805 864 925 stakes in Yonghui and RRHI based on the market values at Pre-tax Profit 555 486 610 662 US$2.28 and US$0.31respectively; and higher net debt at Net Profit 469 404 519 563 Net Pft (Pre Ex.) 463 476 519 563 US$0.54 per share (post financing of its 6.1% stake in RRHI). Net Pft Gth (Pre-ex) (%) 8.1 2.8 9.1 8.4 EPS (US cts.) 34.7 29.8 38.4 41.6 Key Risks to Our View: EPS Pre Ex. (US cts.) 34.2 35.2 38.4 41.6 Significant earnings disappointment. We expect earnings EPS Gth Pre Ex (%) 8 3 9 8 growth to accelerate in FY18F as management brings in better Diluted EPS (US cts.) 34.7 29.8 38.4 41.6 operating efficiencies. We believe that earnings would have to Net DPS (US cts.) 21.0 21.0 21.0 21.0 BV Per Share (US cts.) 111 125 142 163 disappoint significantly to derail our positive bias on the stock. PE (X) 23.1 26.8 20.8 19.2 PE Pre Ex. (X) 23.4 22.7 20.8 19.2 At A Glance P/Cash Flow (X) 19.9 16.1 20.5 16.1 Issued Capital (m shrs) 1,353 EV/EBITDA (X) 14.7 14.3 13.4 12.3 Mkt. Cap (US$m/US$m) 10,821 / 10,821 Net Div Yield (%) 2.6 2.6 2.6 2.6 Major Shareholders (%) P/Book Value (X) 7.2 6.4 5.6 4.9 Jardine Matheson Holdings 77.6 Net Debt/Equity (X) 0.4 0.3 0.4 0.2 ROAE (%) 32.6 25.3 28.7 27.3 Commonwealth Bank of Australia 6.0 Free Float (%) 16.4 Earnings Rev (%): 2 3 Consensus EPS (US cts.): 39.4 43.5 3m Avg. Daily Val (US$m) 4.6 Other Broker Recs: B: 7 S: 0 H: 2 ICB Industry : Consumer Services / Food & Drug Retailers Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Page 40 ed: TH / sa:YM, PY, CS Company Guide Dairy Farm
WHAT’S NEW Rustan spin-off to add US$0.23 net (after financing) to our TP
Dairy Farm sells Rustan Supercenter Inc. for stake in RRHI: impact on DFI’s earnings as Rustan’s losses only contributes to Dairy Farm International (DFI) announced on Friday that it will less than 1% of group earnings. We do not see any major enter into a partnership deal with Robinson’s Retail Holdings issue for DFI to finance the US$174m as the company is Inc. (RRHI). The deal sees DFI 1) selling 100%-owned Rustan capable of generating US$200-300m of operating cashflow Supercenter Inc. to RRHI for 12.15% new RRHI shares worth net of capex a year, and it already has US$332m cash on its US$346m; and 2) buying up an additional 6.1% shares in books as of FY17. RRHI worth US$174m, both valued at a price of P94 per RRHI share, above the current share price. DFI’s 6.1% shares are Negative for RRHI: The deal is negative for RRHI’s share price facilitated via sale of shares by Gokongwei, while the 12.15% as 1) shareholders will experience earnings dilution by as stake in RRHI (from the sale of Rustan) will be paid to DFI via much as 15%, and 2) margins will be reduced when RRHI new shares. DFI will ultimately own 18.25% (12.15%+6.1%) takes in loss-making Rustan. We know that Rustan continued of RRHI, while the Gokongwei family will ultimately reduce to post an EBIT loss in FY17 although we do not know the their stake from 65% to 51% after the share sale and new absolute dollar losses. For comparison, Rustan’s net loss for share dilution. RRHI will thereafter take in 100% of Rustan FY15 was P300m, 5.5% of RRHI’s FY17 earnings forecast and into its operations and DFI will take two board seats in RRHI. 7% of RRHI’s FY15 net profit. Based on our back of the DFI will fund the additional 6.1% investment of US$174m envelope calculations, the target price could be reduced by via internal cash and bank borrowings. Rustan Supercenters, c.6-7%. We believe RRHI sees Rustan as a way to compete Inc. operates Rustan’s Supermarkets, the Shopwise chain of over the long term, with immediate improvement in market hypermarkets and Wellcome. It has a total of around 60 share, store network and presence especially in Metro Manila outlets with presence largely centered around metro Manila. where it also competes with SM and PGold.
DFI sells 100% of Rustan Supercenter Inc. in Philippines to We expect RRHI's earnings contribution to lift DFI’s FY18-19F RRHI and swaps for 18% stake in RRHI earnings by 2-3%: When DFI bought a 20% of Yonghui Superstores in 2015, it accounted Yonghui’s earnings as
Gokongwei JV/associate income. We believe accounting for RRHI’s Public DFI family earnings could be the same and hence we factor in upcoming
51% 31% 18% earnings contribution of RRHI, lifting JV/associate income by 9% in FY18F and 12% in FY19F. This translates into a 2-3% earnings revision for FY18-19F. RRHI
100% 100% RRHI deal adds US$0.23 to our TP, raising it to US$9.77; maintain BUY: We estimate that this exercise could add Rus tan Rus tan c.US$0.23 to our DFI TP. Taking out a loss-making Rustan from DFI presents little or no change to earnings. But the 18% stake in RRHI will add c.US$0.31 with the difference of Source: DFI, RRHI, DBS Bank c.US$0.08 being cash decline used to pay down the 6.1% stake. Post factoring in the impact of RRHI deal, current share Positive for DFI: As Rustan posted a net loss in FY17, there is price now values core business at 16x FY18F PE. Based on no earnings valuation in this deal. DFI has essentially SOTP TP methodology, we now value DFI at US$9.77, with converted a loss-making operation in Philippines into a core business at US$7.72 based on DCF, stake in Yonghui at 12.15% stake in RRHI, which we think is positive. Even US$2.28 based on market value, gross stake in RRHI at though it has bought the additional 6.1% of RRHI above US$0.31 before financing, and higher net debt of US$0.54 market price at a price of P94 per share, this is well (assuming 100% financing of its 6.1% stake in RRHI). compensated by the US$346m that it will receive for spinning off the loss-making Rustan. Furthermore, there is little or no
Page 41 Company Guide Dairy Farm
Number of outlets CRITICAL DATA POINTS TO WATCH 5260 5312.6 5138 5077 5159 5202 Critical Factors 4553.6 3794.7
Building an integrated high performing business. Following the 3035.8 appointment of new CEO Ian McLeod in 2H17, DFI’s management 2276.8 strategy includes building up its management capability, growth in 1517.9
China, maintaining strong position in Hong Kong, revitalising 758.9
Southeast Asia, and driving digital innovation. The new CEO has 0.0 already closed several underperforming and loss-making Supermarket 2015A 2016A 2017A 2018F 2019F and Hypermarket stores, mainly in Malaysia, Singapore and Sales per store blended Indonesia, whose performance he believes will not improve. He has 2.21 2.22 appointed CEOs for 7-eleven and Mannings to drive China’s growth. 2.3 2.17 2.19 2.2
He will also invest to strengthen its brands in Hong Kong. Plans to 1.8 revitalise Southeast Asia include strategic review and management recruitment. Back-end IT development will continue. 1.4
0.9 Expect store performance to strengthen. We are strengthening store performance assumptions going forward, especially in Southeast 0.5
Asia, as the new CEO implements plans including product range, 0.0 space management, pricing strategy, consolidated sourcing, etc. 2015A 2016A 2017A 2018F 2019F There is currently a strategic review on Southeast Asia which we Segment revenue FY17 believe will improve product range and pricing while store closures have already been made. Operational inconsistencies (e.g. procurement, space management) across stores are also being Southeast Asia addressed. 39%
More efficient back-end operations. We see DFI strengthening back- end operations regionally for the long term, with much of the focus North Asia geared towards improving operating efficiencies especially at both 61% store and back-end levels. The areas include e-commerce, IT infrastructure, supply chain, and food and product safety. Growth will be supported by its private label programme, and more Segment revenue FY17 distribution centres across its markets. It has already opened a fresh Home distribution centre in Singapore and new distribution centres in furnishing stores Malaysia and Philippines. In addition, more attention will be focused 6% on operations at store level in the areas of merchandising, display, Health & procurement and sourcing, etc. We believe these will help drive beauty stores higher margins going forward. 23%
Synergies with Yonghui. We expect more synergies with increased collaboration in the sharing of food supplies. These include sharing suppliers and accessing Yonghui’s fresh food (e.g. fruits, etc.) supply chain for its stores in Singapore, Malaysia, Hong Kong, and the Food Philippines. 71%
EBIT margin % 5.5
5.0
4.5
4.0
3.5
3.0 2013A 2014A 2015A 2016A 2017A 2018F 2019F Source: Company, DBS Bank
Page 42 Company Guide Dairy Farm
Appendix 1: A look at Company's listed history – what drives its share price?
Correlation between share price and absolute operating profit (EBIT) is strong at 0.8x (US$) US$m 16.00 EBIT (RHS) Price (LHS) 600
14.00 Gross profit grew 550 by 8% CAGR to 12.00 US$1.4bn 500 10.00 450 8.00 400 6.00 350
4.00 Opex increased by 5% CAGR, 300 reducing EBIT margins from 5.8% to EBIT grew 4% y-o-y on 2.00 4.2% stronger gross margin 250 0.00 200 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Source: DBS Bank
Page 43 Company Guide Dairy Farm
Leverage & Asset Turnover (x) Balance Sheet: 2.5 Lower net debt. DFI’s net debt-to-equity fell from 0.43x to 0.70 2.4 0.36x with net debt at US$602m as at end-FY17, led by debt 0.60 repayment and higher cash balances generated. The net debt 0.50 2.3 0.40 initially resulted from the purchase of Yonghui in FY16. DFI’s 2.2 0.30 business generates strong operational cash flows of over 2.1 US$500m a year. We believe that DFI’s debt will pare down 0.20 2.0 over the next few years. 0.10 0.00 1.9 2015A 2016A 2017A 2018F 2019F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) Earnings turnaround. We believe share price upside will be Capital Expenditure driven by earnings recovery. Our view on the stock is based on US$m DFI’s ability to turn in more efficient operations going forward 300.0 that will drive earnings growth. Key indicators are higher 250.0 contribution by Yonghui and margin expansion of core business 200.0 through better cost management and margin enhancement 150.0 initiatives (i.e. distribution centres). IT and backend 100.0 enhancement initiatives should also support a better cost 50.0 structure in terms of centralised procurement, logistics and 0.0 other operations, etc. 2015A 2016A 2017A 2018F 2019F
Capital Expenditure (-) Cooperation with Yonghui may drive long-term share price. We ROE (%) are positive on DFI’s Yonghui investment because the partnership with Yonghui provides a good platform to scale up 30.0% DFI’s business in China. Longer-term opportunities include 25.0% exposure to China’s modern grocery retail consumption, more 20.0% Mannings stores and better supply of products to each other. 15.0%
Key Risks: 10.0% Profitability susceptible to rental and labour costs. As a retailer, 5.0% labour and rental costs are key operating cost components. 0.0% Significant changes in these components will affect earnings 2015A 2016A 2017A 2018F 2019F growth. Higher rental and labour costs were seen in Hong Forward PE Band (x) Kong, Singapore and Indonesia in FY15-16, which resulted in (x) lower margins. 33.1 + 2sd: 20x
Competitive pressure. Grocery retail customers can be price 28.1 + 1sd: 17x sensitive and may switch to retailers which offer more promotions. This can be a risk to market share, sales and 23.1 Avg: 23.3x earnings growth. In times of weaker consumer sentiment, -1sd: 10.9x 18.1 customers may trade down from high-end supermarkets to the -2sd: 7.8x mass-market segment. DFI has plans to strengthen its 13.1 marketing to the mass-market segment and target specifically Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 local consumers. PB Band (x) (x)
Company Background 11.0 + 2sd: 20x Dairy Farm is a Pan Asian retailer, operating over 6,400 10.0 supermarkets, hypermarkets, health and beauty stores, 9.0 + 1sd: 17x convenience stores, home furnishing stores and restaurants 8.0 Avg: 7.46x under well-known brand names in Hong Kong, Taiwan, China, 7.0
Macau, Singapore, India, the Philippines, Cambodia, Brunei, 6.0 -1sd: 10.9x
Malaysia, Indonesia and Vietnam. 5.0 -2sd: 7.8x 4.0 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: Company, DBS Bank
Page 44 Company Guide Dairy Farm
Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F Number of outlets 5,138 5,077 5,159 5,202 5,260 Sales per store blended 2.17 2.21 2.19 2.20 2.22 Segmental Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F Revenues (US$m) Food 8,197 8,168 8,038 7,897 7,829 Health & beauty stores 2,373 2,436 2,597 2,809 3,038 Home furnishing stores 568 597 653 734 824
Total 11,137 11,201 11,289 11,440 11,691 Operating profit (US$m) Food 236 267 220 216 217 Health & beauty stores 186 176 210 225 243 Home furnishing stores 63.6 70.6 68.0 76.4 85.9 Support office/others (49.6) (60.7) (57.7) (58.5) (59.8)
Total 435 453 440 459 486 Operating profit Margins (%) Food 2.9 3.3 2.7 2.7 2.8 Health & beauty stores 7.8 7.2 8.1 8.0 8.0 Home furnishing stores 11.2 11.8 10.4 10.4 10.4 Support office/others N/A N/A N/A N/A N/A
Total 3.9 4.0 3.9 4.0 4.2
Income Statement (US$m) FY Dec 2015A 2016A 2017A 2018F 2019F Revenue 11,137 11,201 11,289 11,440 11,691 Cost of Goods Sold (7,852) (7,815) (7,856) (8,008) (8,184) Gross Profit 3,285 3,386 3,433 3,432 3,507 Other Opng (Exp)/Inc (2,850) (2,933) (2,992) (2,973) (3,021) Operating Profit 435 453 440 459 486 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 85.0 118 144 177 206 Net Interest (Exp)/Inc (13.6) (21.8) (26.3) (25.8) (30.8) Exceptional Gain/(Loss) (4.2) 6.20 (72.3) 0.0 0.0 Pre-tax Profit 503 555 486 610 662 Tax (84.5) (85.1) (92.9) (105) (113) Minority Interest 5.80 (1.1) 10.6 13.3 14.4 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Includes 18% earnings Net Profit 424 469 404 519 563 contribution from RRHI. Net Profit before Except. 428 463 476 519 563 EBITDA 732 784 805 864 925 Growth Revenue Gth (%) 1.2 0.6 0.8 1.3 2.2 EBITDA Gth (%) (8.0) 7.0 2.8 7.3 7.0 Opg Profit Gth (%) (17.0) 4.0 (2.7) 4.2 5.9 Net Profit Gth (Pre-ex) (%) (14.3) 8.1 2.8 9.1 8.4 Margins & Ratio Gross Margins (%) 29.5 30.2 30.4 30.0 30.0 Opg Profit Margin (%) 3.9 4.0 3.9 4.0 4.2 Net Profit Margin (%) 3.8 4.2 3.6 4.5 4.8 ROAE (%) 30.2 32.6 25.3 28.7 27.3 ROA (%) 9.3 9.4 7.6 9.2 9.5 ROCE (%) 17.1 14.9 12.7 12.4 12.2 Div Payout Ratio (%) 63.8 60.5 70.4 54.7 50.5 Net Interest Cover (x) 32.0 20.8 16.7 17.8 15.8 Source: Company, DBS Bank
Page 45 Company Guide Dairy Farm
Quarterly / Interim Income Statement (US$m) FY Dec 2H2015 1H2016 2H2016 1H2017 2H2017
Revenue 5,544 5,562 5,639 5,505 5,783 Cost of Goods Sold (3,891) (3,914) (3,901) (3,850) (4,007) Gross Profit 1,653 1,648 1,737 1,656 1,777 Other Oper. (Exp)/Inc (1,419) (1,451) (1,482) (1,456) (1,537) Operating Profit 235 197 256 200 240 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 53.3 46.5 71.7 61.3 82.9 Net Interest (Exp)/Inc (8.0) (9.0) (12.8) (12.4) (13.9) Exceptional Gain/(Loss) (4.2) 0.0 6.20 0.0 (72.3) Pre-tax Profit 276 234 321 249 237 Tax (45.0) (37.4) (47.7) (40.0) (52.9) Minority Interest 1.50 2.30 (3.4) 2.40 8.20 Net Profit 232 199 270 211 192 Net profit bef Except. 237 199 264 211 264 EBITDA 288 243 327 261 323
Growth Revenue Gth (%) (0.9) 0.3 1.4 (2.4) 5.1 EBITDA Gth (%) 24.0 (15.5) 34.5 (20.2) 23.6 Opg Profit Gth (%) 17.0 (16.1) 29.9 (21.7) 20.0 Net Profit Gth (%) 21.3 (14.2) 35.3 (21.6) (9.1) Margins Gross Margins (%) 29.8 29.6 30.8 30.1 30.7 Opg Profit Margins (%) 4.2 3.5 4.5 3.6 4.2 Net Profit Margins (%) 4.2 3.6 4.8 3.8 3.3
Balance Sheet (US$m) FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 1,141 1,100 1,184 1,179 1,171 Invts in Associates & JVs 1,292 1,462 1,601 1,952 2,159 Other LT Assets 948 951 1,011 989 967 Cash & ST Invts 259 324 332 375 363 Inventory 937 983 950 1,009 1,009 Debtors 234 291 351 298 352 Other Current Assets 11.2 19.4 38.3 38.3 38.3 Total Assets 4,821 5,129 5,467 5,840 6,060
ST Debt 730 370 413 413 413 Creditor 2,355 2,328 2,470 2,413 2,556 Other Current Liab 66.6 73.4 130 163 172 LT Debt 10.6 595 522 696 500 Other LT Liabilities 204 184 177 177 177 Shareholder’s Equity 1,376 1,505 1,690 1,925 2,204 Minority Interests 79.4 74.1 65.7 52.4 37.9 Total Cap. & Liab. 4,821 5,129 5,467 5,840 6,060 Assume 6.1% stake in RRHI at US$174m is fully funded Non-Cash Wkg. Capital (1,239) (1,108) (1,261) (1,231) (1,328) by debt Net Cash/(Debt) (482) (641) (602) (734) (550) Debtors Turn (avg days) 8.0 8.5 10.4 10.3 10.1 Creditors Turn (avg days) 113.9 112.4 114.7 114.5 114.1 Inventory Turn (avg days) 46.5 46.1 46.2 46.0 46.3 Asset Turnover (x) 2.4 2.3 2.1 2.0 2.0 Current Ratio (x) 0.5 0.6 0.6 0.6 0.6 Quick Ratio (x) 0.2 0.2 0.2 0.2 0.2 Net Debt/Equity (X) 0.3 0.4 0.3 0.4 0.2 Net Debt/Equity ex MI (X) 0.4 0.4 0.4 0.4 0.2 Capex to Debt (%) 34.9 20.6 23.4 18.1 22.3 Z-Score (X) 4.6 4.6 4.3 4.4 4.3
Source: Company, DBS Bank
Page 46 Company Guide Dairy Farm
Cash Flow Statement (US$m) FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 503 555 486 610 662 Dep. & Amort. 212 213 221 228 232 Tax Paid (90.2) (95.3) (84.3) (71.6) (105) Assoc. & JV Inc/(loss) (85.0) (118) (144) (177) (206) Chg in Wkg.Cap. 73.0 (134) 140 (62.5) 88.4 Other Operating CF 87.5 122 53.5 0.0 0.0 Net Operating CF 700 543 671 527 671 Capital Exp.(net) (259) (199) (218) (200) (203) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (918) (197) (5.8) (174) 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (189) (32.1) (56.4) 0.0 0.0 Net Investing CF (1,365) (428) (281) (374) (203) Investment in RRHI Div Paid (311) (270) (284) (284) (284) Chg in Gross Debt 573 238 (40.9) 174 (196) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 15.7 (9.7) (63.0) 0.0 0.0 Net Financing CF 278 (42.5) (388) (110) (480) Currency Adjustments (12.1) (6.5) 9.10 0.0 0.0 Assume 6.1% stake in Chg in Cash (400) 65.9 11.9 42.2 (11.9) RRHI at US$174m is Opg CFPS (US cts.) 46.4 50.0 39.3 43.6 43.1 fully funded by debt Free CFPS (US cts.) 32.6 25.4 33.5 24.1 34.6 Source: Company, DBS Bank
Target Price & Ratings History
9.55 US$ 12-mth Date of Closing S.No. T arget Rating Report Price Price 9.05 1: 18 Jul 17 8.16 9.96 BUY 2: 08 Aug 17 7.81 9.89 BUY 3: 12 Mar 18 8.09 9.54 BUY 8.55
8.05 1 2 3
7.55
7.05 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18
Note : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank Analyst: Alfie YEO Andy SIM, CFA
Page 47 Company Guide Dairy Farm
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 28 Mar 2018 08:17:16 (SGT) Dissemination Date: 28 Mar 2018 08:25:52 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
Page 48 Company Guide Dairy Farm
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 28 Feb 2018. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 49 Singapore Flash Note
Refer to important disclosures at the end of this report
DBS Group Research . Equity 23 Feb 2018
Sheng Siong Group (SSG SP) : BUY Mkt. Cap: US$1,054m I 3m Avg. Daily Val: US$1.1m Last Traded Price ( 22 Feb 2018): S$0.925 Price Target 12-mth: S$1.20 (30% upside) (Prev S$1.19)
Analyst Alfie YEO +65 6682 3717; [email protected] Andy SIM, CFA +65 6682 3718; [email protected] New outlets to drive growth
• FY17F earrings in line, driven by better gross margins What’s New and sales efficiencies FY17 in line. Revenue and earnings of S$S$830m (+4.2% y- • Final dividend of 1.75 Scts declared o-y) and S$69.5m (+10.9% y-o-y) for FY17 were in line with our forecast. Revenue growth was driven by new stores and • Growth to be driven by new outlets, 9 new stores and selling area added between 1Q17 to 1Q18 improved efficiency based on sales per square feet, offset by closure of the Verge and Woodlands stores. Same store sales • Maintain BUY, TP S$1.20 based on 25x FY18F PE growth (SSSG) grew by 2.1%. Gross margin was 26.2% (+0.5ppt) on lower cost of goods from better pricing, supplier rebates and volume discounts. EBIT as a result was 10% y-o-y higher at S$71.5m. Opex grew in line with Forecasts and Valuation revenue. FY Dec (S$m) 2016A 2017A 2018F 2019F Revenue 797 830 845 880 EBITDA 80.0 86.3 90.9 100 More outlets to drive growth going forward. Sheng Siong Pre-tax Profit 76.2 82.1 87.1 93.4 cranked up a >10% core earnings growth in FY17 which we Net Profit 62.7 69.5 72.2 77.5 Net Pft (Pre Ex.) 62.7 69.5 72.2 77.5 believe is remarkable despite 1) the closure of two 40,000 Net Pft Gth (Pre-ex) (%) 10.4 10.9 3.8 7.3 sqft stores at Woodlands and the Verge; and 2) the entry of EPS (S cts) 4.17 4.62 4.80 5.15 EPS Pre Ex. (S cts) 4.17 4.62 4.80 5.15 Amazon Prime in Singapore. While floor area has reduced by EPS Gth Pre Ex (%) 10 11 4 7 46,000 sqft (-10%) in FY17, better sales efficiencies and Diluted EPS (S cts) 4.17 4.62 4.80 5.15 Net DPS (S cts) 3.75 3.30 3.36 3.61 margins made up for the loss of selling area. It added 8 new BV Per Share (S cts) 16.8 18.0 19.4 21.0 stores and expanded selling area in another store in 2017 PE (X) 22.2 20.0 19.3 18.0 PE Pre Ex. (X) 22.2 20.0 19.3 18.0 and will add more than 30,000 sqft of space in 1Q18 at P/Cash Flow (X) 17.8 17.7 13.3 14.4 Canberra, Anchorvale, Fernvale, and ITE Ang Mo Kio. EV/EBITDA (X) 16.6 15.3 14.2 12.6 Net Div Yield (%) 4.1 3.6 3.6 3.9 Pipeline for planned HDB supermarkets in the next 6 months P/Book Value (X) 5.5 5.1 4.8 4.4 remains robust with 11 supermarket locations already Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 25.3 26.6 25.6 25.5 earmarked for tender. Sheng Siong’s China store in
Source of all data on this page: Company, DBS Bank, Bloomberg Kunming also finally opened in November 2017. Finance L.P. Contribution is expected to be minimal for now.
Maintain BUY, TP S$1.20 based on 25x FY18F PE. There is no significant change to our earnings projections since FY17 and 4Q17 earnings were in line with our expectations. Our TP based on 25x FY18F PE is now S$1.20.
ed:JS / sa: SM, PY, CS Page 50 Flash Note
Quarterly / Interim Income Statement (S$m) FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 197 211 200 1.7 (5.0) Cost of Goods Sold (145) (156) (145) 0.0 (7.2) Gross Profit 51.8 54.5 55.1 6.3 1.2 Other Oper. (Exp)/Inc (35.3) (35.5) (38.6) 9.3 8.8 Operating Profit 16.5 19.0 16.5 0.0 (13.0) Other Non Opg (Exp)/Inc 2.37 2.03 3.99 68.4 96.7 Associates & JV Inc 0.0 0.0 0.0 - - Net Interest (Exp)/Inc 0.01 0.10 0.08 nm (20.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Pre-tax Profit 18.9 21.1 20.6 8.9 (2.5) Tax (3.5) (1.5) (3.9) 12.7 159.5 Minority Interest 0.0 0.0 0.0 - - Net Profit 15.4 19.6 16.7 8.1 (15.0) Net profit bef Except. 15.4 19.6 16.7 8.1 (15.0) EBITDA 22.6 24.7 24.3 7.5 (1.7) Margins (%) Gross Margins 26.3 25.8 27.5 Opg Profit Margins 8.4 9.0 8.3 Net Profit Margins 7.8 9.3 8.3
Source of all data: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Alfie YEO Andy SIM, CFA
Page 51 Flash Note
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 23 Feb 2018 06:46:05 (SGT) Dissemination Date: 23 Feb 2018 08:33:12 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
Page 52 Flash Note
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a proprietary position in Sheng Siong Group recommended in this report as of 31 Jan 2018. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 53 Singapore Company Guide Sheng Siong Group
Version 10 | Bloomberg: SSG SP | Reuters: SHEN.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 28 Jul 2017
BUY CONTINUES DELIVERING Last Traded Price ( 27 Jul 2017): S$0.95 (STI : 3,354.71) Price Target 12-mth: S$1.20 (26% upside) Maintain BUY TP S$ 1.20, margin expansion to drive earnings growth. We remain positive on Sheng Siong as we see growth Analyst led by improving margins. We believe expansion of its Alfie YEO +65 6682 3717 [email protected] distribution centre will continue and the company will sustain Andy SIM CFA +65 6682 3718 [email protected] gross margins going forward. Margins remain on the uptrend – supported by the increase in direct sourcing, bulk handling, and What’s New fresh mix – contributing to earnings growth. Stock is trading 2Q17 earnings in line, gross margin expansion attractively at 19.8x FY18F PE, compared to its historical average continues of 23x since listing. Yield is attractive at 4.5%. DPS of 1.55 Scts declared Amazon’s entry not a serious threat for now Where we differ. We do not think Amazon’s entry will pose a serious threat to Sheng Siong for now for six reasons. The Maintain BUY, TP S$1.20 online pie remains small; Sheng Siong’s target customers are not the millennials who are open to online grocery shopping; Amazon’s warehouse is relatively small; Amazon will pose a Price Relative more direct threat to Redmart; its pricing is not exactly cheap to S$ Relative Index attract offline buyers online; and the online market will take 1.2 215 1.1 195 time to gain share from brick-and-mortar stores rather than 1.0 175 0.9 155 ramp up rapidly. 0.8 135
0.7 115
0.6 95 0.5 75 Potential catalyst. We believe that Sheng Siong, with its decent Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Sheng Siong Group (LHS) Relative STI (RHS) store network and logistics chain, could possibly be a takeover target by online players eventually. Online players such as Forecasts and Valuation Alibaba’s and Amazon (Wholefoods) are taking the FY Dec (S$ m) 2016A 2017F 2018F 2019F 盒马鲜生 online-to-offline route, operating physical stores. Revenue 797 807 828 878 EBITDA 80.0 85.4 92.2 101 Pre-tax Profit 76.2 80.4 86.8 92.2 Valuation: Net Profit 62.7 66.8 72.0 76.5 Our target price for Sheng Siong is S$ 1.20, based on 25x Net Pft (Pre Ex.) 62.7 66.8 72.0 76.5 FY18F PE. The valuation is pegged at +1SD of its historical Net Pft Gth (Pre-ex) (%) 10.4 6.5 7.8 6.2 mean since listing and below regional peers' average of 30x EPS (S cts) 4.17 4.44 4.79 5.08 EPS Pre Ex. (S cts) 4.17 4.44 4.79 5.08 PE. EPS Gth Pre Ex (%) 10 6 8 6 Diluted EPS (S cts) 4.17 4.44 4.79 5.08 Key Risks to Our View: Net DPS (S cts) 3.75 3.99 4.31 4.57 Store openings, price competition. Revenue growth will be led BV Per Share (S cts) 16.8 17.2 17.7 18.2 PE (X) 22.8 21.4 19.8 18.7 by new store openings. Excessive discounts and promotions in PE Pre Ex. (X) 22.8 21.4 19.8 18.7 the market by competitors will ultimately result in lower P/Cash Flow (X) 18.3 20.0 13.2 14.7 margins. EV/EBITDA (X) 17.1 16.1 14.7 13.3 Net Div Yield (%) 3.9 4.2 4.5 4.8 P/Book Value (X) 5.7 5.5 5.4 5.2 At A Glance Net Debt/Equity (X) CASH CASH CASH CASH Issued Capital (m shrs) 1,504 ROAE (%) 25.3 26.1 27.4 28.3 Mkt. Cap (S$m/US$m) 1,428 / 1,052 Major Shareholders (%) Earnings Rev (%): (3) 0 0 Consensus EPS (S cts): 4.50 4.70 4.90 SS Holdings 29.85 Other Broker Recs: B: 6 S: 1 H: 2 Lim Family 33.99 Source of all data on this page: Company, DBS Bank, Bloomberg Free Float (%) 36.16 Finance L.P 3m Avg. Daily Val (US$m) 1.5 ICB Industry : Consumer Services / Food & Drug Retailers
ASIAN INSIGHTS VICKERS SECURITIES Page 54 ed: JLC / sa:JC, YM, PY Company Guide
Sheng Siong Group
WHAT’S NEW 2Q17 results
2Q17 in line: Earnings of S$$16m (+6% y-o-y) were in line the 12,000-sqft Woodlands St 12 store. The Kunming store is with our expectations. Revenue of S$202m (+7% y-o-y) was expected to open in September 2017. driven by 0.9% SSSG and 5.2% from new stores. Better Amazon opens this week, not a real threat for now. Amazon consumer sentiment was offset by footfall decline at stores has started operations in Singapore with Amazon Prime Now, affected by the slowdown in the oil and gas industry, sending jitters through Sheng Siong’s stock investors. The Woodlands store, as well as Tampines renovation. An interim entry of Amazon should not affect Sheng Siong for now as DPS of 1.55 Scts was declared, amounting to 70% payout in 1) Singapore’s online grocery retail market remains small at 1H17. <2% (S$96m) of modern grocery retail sales of S$6b; Gross margins all-time high: Gross margins hit an all-time 2) Amazon’s scale is relatively small; its 100,000-sqft high of 26.6% due to lower input costs, better supplier warehouse is comparable to Redmart’s but far smaller than rebates, and better fresh food mix. DFI’s 260,000-sqft, SSG’s 500,000-sqft and NTUC Fairprice’s 730,000-sqft warehouses; Record high operating profit margin at 8.9%. Operating 3) Amazon would pose a direct threat to Redmart as they profit was S$17.9m (+11.8% y-o-y), and flat Q-o-Q. both target the same customers in the online grocery space; Operating expenses increased by (+6.8% y-o-y), led by admin 4) we do not see the market size swelling just because expenses which grew 6% to S$33.6m. Operating profit Amazon is coming in, as the growth of the grocery market is margin was at a record high as gross margins expanded while still largely based on population size and inflation, which operating expenses were kept at 17.7% of sales. requires a real shift from store to online for Sheng Siong to Other income fell. Other income dropped to S$1.8m and this be affected; was due to 1) lower rental income as the property floor area 5) our initial price comparison showed that Amazon’s pricing of its Tampines site was increased to 25,000 sqft; and 2) a is not exactly cheap at the moment, making it difficult to take decline in government grants on lower wage credits as well share off the physical stores at current prices; as temporary and special employment schemes. 6) Sheng Siong’s target customers are largely not the tech- savvy millennials who are open to buying from online Expect gross margins to improve further. As expected, Sheng channels. Siong continued in its margin improvement with record gross and operating margins. We have held the view that margin Maintain BUY, S$1.20 TP. Our forecasts remain largely expansion will continue on the back of better input prices as unchanged. We maintain BUY with S$1.20 TP, based on 25x it expands its distribution centre going forward. Completion FY18F PE. Even though we do not see fundamentals playing of new warehouse space going forward will drive the growth out immediately on Amazon’s entry, we are mindful that the of gross margins further with bulk and volume discounts. market may be cautious on long-term implications to Sheng Correlation between the stock price and gross margin is Siong and hence would like to highlight that negativity could strong at 0.9. The Verge store has closed but the Woodlands weigh on the stock over the short term, based on market store’s lease has been extended to October 2017. Two new sentiment. stores will open in 3Q17 - the 4,300-sqft Fajar Road store and
ASIAN INSIGHTS VICKERS SECURITIES
Page 55 Company Guide
Sheng Siong Group
Quarterly / Interim Income Statement (S$m) FY Dec 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq
Revenue 189 217 202 6.8 (7.2) Cost of Goods Sold (139) (163) (148) 6.2 (9.1) Gross Profit 49.4 54.3 53.5 8.4 (1.5) Other Oper. (Exp)/Inc (33.3) (36.3) (35.6) 6.8 (1.9) Operating Profit 16.0 18.0 17.9 11.8 (0.6) Other Non Opg (Exp)/Inc 2.14 2.53 1.80 (16.0) (28.7) Associates & JV Inc 0.0 0.0 0.0 - - Net Interest (Exp)/Inc 0.20 0.02 0.03 (83.8) 37.5 Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Pre-tax Profit 18.4 20.6 19.8 7.5 (4.0) Tax (3.2) (3.5) (3.7) 14.1 5.9 Minority Interest 0.0 0.01 0.0 - - Net Profit 15.2 17.1 16.1 6.1 (6.1) Net profit bef Except. 15.2 17.1 16.1 6.1 (6.1) EBITDA 22.1 24.3 23.4 6.0 (3.6)
Margins (%) Gross Margins 26.1 25.0 26.6 Opg Profit Margins 8.5 8.3 8.9 Net Profit Margins 8.0 7.9 8.0
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
Page 56 Company Guide
Sheng Siong Group
Rev per sqft CRITICAL DATA POINTS TO WATCH 1892 1911.1 1848 1850 1816 1808 Critical Factors 1638.1 Store expansion. Sheng Siong currently operates 43 stores 1365.1
(including at Loyang Point which is under renovation). 1092.0 Compared to the other local operators, it has scope to expand 819.0 its store network, particularly in areas such as Serangoon, 546.0 Hougang and Sengkang, where it has a small presence. 273.0 Management targets to ultimately operate 50 stores island- 0.0 wide. In the past six years, 0-8 stores were opened annually, 2015A 2016A 2017F 2018F 2019F largely a function of supply of HDB shop space available for tender and Sheng Siong’s ability to win the tenders. Sheng Operation Area (sqft) 515664 Siong mainly operates in HDB estates. 525977.3 485664 450000 455664 431000 420781.8 Gross margin expansion through better sales mix. The gross margin for fresh products is estimated to be >30%, and close to 315586.4 20% for non-fresh grocery items. Sheng Siong’s product mix 210390.9 stands at approximately 40% fresh vs 60% non-fresh. We see headroom for its sales mix to improve to 50% for each as it 105195.5 skews its store offerings towards fresh products. 0.0 2015A 2016A 2017F 2018F 2019F Mandai Distribution Centre to expand. The Mandai Distribution Number of stores Centre allows Sheng Siong to perform direct sourcing and bulk 51 handling. This effectively drives down input costs, resulting in 52.02 48 45 cost savings and better margins. We estimate that the facility is 42 41.62 39 currently running at only 90% of capacity and a new warehouse adjacent to the current one is expected to start 31.21 construction in FY17F. It will be able to secure more suppliers 20.81 and products to trade through the distribution centre to effectively enjoy more bulk handling and higher supplier 10.40 rebates. Margins are expected to trend up as utilisation 0.00 increases towards full capacity. 2015A 2016A 2017F 2018F 2019F
SSSG (%) Margin expansion through direct sourcing. Sheng Siong is 6.0% increasingly sourcing directly from suppliers such as farms 5.0% instead of from middlemen. The company has the resources to 4.0% Weak demand conditions, place large orders, which is welcomed by producers. Affected by store 3.0% SG50 renovations promotion and 2.0% discounting Generating more same-store-sales growth (SSSG) to increase 1.0% revenue. Sheng Siong has been able to maintain positive SSSG 0.0% since 4Q13 (excluding 4Q15, 1Q16) through longer operating -1.0% 3Q & 4Q would be negative 1.2% & hours and renovation of older stores, offering the correct 2.7% if include -2.0% Loyang store products and effective marketing. SSSG has been affected partly renovation -3.0% by the renovation of the Loyang store from 3Q16 to 1Q17. The 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 SSSG would have been positive had the Loyang store performed similarly to the previous year and was not shut down for Gross Margins (%) 27.0 renovation. Maintaining positive SSSG will support earnings 26.5 growth. 26.0 25.5 Kunming store in China to open in 2017. Its first store in 25.0 Kunming (40,000 sqft) is expected to commence operations in 24.5 2017. Downside for the JV is limited to its US$6m paid-up 24.0 capital, which is sufficient to open 2-3 new stores. 23.5 23.0 22.5 22.0 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Source: Company, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES
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Appendix 1: A look at Company's listed history – what drives its share price?
Correlation of stock price to gross margin improvement is strong at 0.9 S$Gross margins (RHS) Share price (LHS) % 1.20 30
Gross margins expanded from 1.00 20.8% to 23.2% 28
0.80 25
0.60 Gross margins 23 at all time high of c.26%
0.40 Gross margins 20 expanded from 23.8% to 25.2% 0.20 18 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Source: DBS Bank
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Leverage & Asset Turnover (x) Balance Sheet: 0.05 2.2 0.05 Net cash of over S$70m or c.4 Scts per share. The excess cash 0.04 2.2 allows for strategic store acquisitions if suitable real estate arises 0.04 0.03 for it to expand its store presence in the future. The business 0.03 2.1 generates positive working capital. Inventory is purchased on 0.02 0.02 credit, and quickly turned into cash. Over the past seven years, 2.1 the business has generated between S$20-75m of operating 0.01 0.01 cashflow each year. Dividend payout is attractive at 90%. We 0.00 2.0 expect this to be maintained as long as there is no significant 2015A 2016A 2017F 2018F 2019F Gross Debt to Equity (LHS) Asset Turnover (RHS) requirement for cash funding. Capital Expenditure S$m Share Price Drivers: 100.0 90.0 80.0 Strong earnings growth performance. Sheng Siong’s financial 70.0 performance has consistently met our expectations, delivering 60.0 50.0 earnings growth (5-year CAGR of 18.1% since FY11) through a 40.0 combination of margin expansion, store growth and SSSG. We 30.0 20.0 believe continued delivery of consistent performance and profit 10.0 growth will support a strong share price. 0.0 2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-) China to be a wildcard. We believe Sheng Siong’s JV in China is a wildcard. If operations prove to be successful, in time to ROE (%) come, China can provide an alternate source of growth. There is 25.0% scope for the number of stores to increase should Sheng Siong’s business model work. Downside remains limited to US$6m for 20.0% now should the JV fail. 15.0%
10.0% Key Risks: 5.0% Revenue growth limited by store openings. Store expansion in 0.0% Singapore is largely dependent on the supply of new 2015A 2016A 2017F 2018F 2019F supermarket retail space released by HDB and its ability to Forward PE Band (x) secure the tenders. (x) 27.4
Excessive discounts and promotions may erode margins. 25.4 Heavier discounts and promotions vis-a-vis competitors would 23.4 +2sd: 23.8x drive sales revenue, but this could be gained at the expense of +1sd: 22.2x 21.4 margins. Avg: 20.5x 19.4 ‐1sd: 18.8x Company Background 17.4 ‐2sd: 17.2x
15.4 Sheng Siong is the third-largest supermarket operator in Jul-13 Jul-14 Jul-15 Jul-16 Singapore, behind NTUC Fairprice and Dairy Farm PB Band (x) International. 7.3 (x)
6.8
6.3 +2sd: 6.41x
5.8 +1sd: 5.88x
5.3 Avg: 5.36x
4.8 ‐1sd: 4.83x
4.3 ‐2sd: 4.31x
3.8 Jul-13 Jul-14 Jul-15 Jul-16 Source: Company, DBS Bank
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Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Rev per sqft 1,892 1,848 1,850 1,816 1,808 Operation Area (sqft) 431,000 450,000 455,664 485,664 515,664 Number of stores 39.0 42.0 45.0 48.0 51.0
Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F
Revenues (S$m) Singapore 764 797 807 828 878
Total 764 797 807 828 878 Operating profit (S$m) Singapore 57.2 65.1 70.3 76.7 84.3
Total 57.2 65.1 70.3 76.7 84.3 Operating profit Margins Singapore 7.5 8.2 8.7 9.3 9.6
Total 7.5 8.2 8.7 9.3 9.6
Income Statement (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 764 797 807 828 878 Cost of Goods Sold (576) (592) (597) (610) (645) Gross Profit 189 205 210 218 233 Other Opng (Exp)/Inc (132) (140) (140) (141) (148) Operating Profit 57.2 65.1 70.3 76.7 84.3 Other Non Opg (Exp)/Inc 9.26 10.5 9.53 9.60 7.20 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 1.22 0.57 0.64 0.58 0.78 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 67.7 76.2 80.4 86.8 92.2 Tax (10.9) (13.5) (13.7) (14.8) (15.7) Minority Interest 0.0 0.0 0.0 (0.1) (0.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 56.8 62.7 66.8 72.0 76.5 Net Profit before Except. 56.8 62.7 66.8 72.0 76.5 EBITDA 70.6 80.0 85.4 92.2 101 Growth Revenue Gth (%) 5.3 4.2 1.3 2.5 6.1 EBITDA Gth (%) 12.1 13.3 6.7 7.9 9.3 Opg Profit Gth (%) 9.7 13.7 8.0 9.1 9.9 Net Profit Gth (Pre-ex) (%) 20.8 10.4 6.5 7.8 6.2 Margins & Ratio Gross Margins (%) 24.7 25.7 26.0 26.3 26.5 Opg Profit Margin (%) 7.5 8.2 8.7 9.3 9.6 Net Profit Margin (%) 7.4 7.9 8.3 8.7 8.7 ROAE (%) 23.6 25.3 26.1 27.4 28.3 ROA (%) 15.9 16.6 17.3 18.0 18.1 ROCE (%) 19.8 21.3 22.4 23.8 25.4 Div Payout Ratio (%) 92.7 89.9 89.9 89.9 89.9 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Bank
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Quarterly / Interim Income Statement (S$m) FY Dec 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017
Revenue 189 202 197 217 202 Cost of Goods Sold (139) (150) (145) (163) (148) Gross Profit 49.4 52.5 51.8 54.3 53.5 Other Oper. (Exp)/Inc (33.3) (35.6) (35.3) (36.3) (35.6) Operating Profit 16.0 16.9 16.5 18.0 17.9 Other Non Opg (Exp)/Inc 2.14 2.21 2.37 2.53 1.80 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.20 0.02 0.01 0.02 0.03 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 18.4 19.1 18.9 20.6 19.8 Tax (3.2) (3.4) (3.5) (3.5) (3.7) Minority Interest 0.0 0.0 0.0 0.01 0.0 Net Profit 15.2 15.7 15.4 17.1 16.1 Net profit bef Except. 15.2 15.7 15.4 17.1 16.1 EBITDA 22.1 22.8 22.6 24.3 23.4
Growth Revenue Gth (%) (9.5) 7.2 (2.7) 10.2 (7.2) EBITDA Gth (%) (4.0) 3.3 (1.1) 7.7 (3.6) Opg Profit Gth (%) 2.5 5.2 (1.9) 9.0 (0.6) Net Profit Gth (Pre-ex) (%) (7.6) 3.3 (1.5) 11.0 (6.1) Margins Gross Margins (%) 26.1 25.9 26.3 25.0 26.6 Opg Profit Margins (%) 8.5 8.3 8.4 8.3 8.9 Net Profit Margins (%) 8.0 7.7 7.8 7.9 8.0
Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 178 252 254 262 256 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.0 0.0 0.0 0.0 0.0 Cash & ST Invts 126 63.5 57.5 77.5 95.6 Inventory 52.5 61.9 61.3 62.6 66.2 Debtors 11.8 10.4 12.1 11.0 11.6 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 368 388 385 413 430
ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 109 118 108 127 135 Other Current Liab 12.6 13.0 13.7 14.8 15.7 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 2.24 2.45 2.45 2.45 2.45 Shareholder’s Equity 244 252 259 266 274 Minority Interests 0.0 2.79 2.79 2.89 2.99 Total Cap. & Liab. 368 388 385 413 430
Non-Cash Wkg. Capital (57.1) (58.3) (47.9) (68.5) (72.9) Net Cash/(Debt) 126 63.5 57.5 77.5 95.6 Debtors Turn (avg days) 5.4 5.1 5.1 5.1 4.7 Creditors Turn (avg days) 66.4 71.5 70.6 72.1 76.1 Inventory Turn (avg days) 31.0 36.2 38.6 38.0 37.4 Asset Turnover (x) 2.1 2.1 2.1 2.1 2.1 Current Ratio (x) 1.6 1.0 1.1 1.1 1.2 Quick Ratio (x) 1.1 0.6 0.6 0.6 0.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 10.0 9.3 9.9 8.8 8.8 Source: Company, DBS Bank
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Cash Flow Statement (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 67.7 76.2 80.4 86.8 92.2 Dep. & Amort. 13.4 14.9 15.1 15.5 16.4 Tax Paid (10.7) (12.6) (13.0) (13.7) (14.8) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 2.54 0.77 (11.0) 19.5 3.50 Other Operating CF 0.52 (1.2) 0.0 0.0 0.0 Net Operating CF 73.5 78.1 71.5 108 97.4 Capital Exp.(net) (30.4) (89.3) (17.5) (23.5) (10.5) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1.22 0.57 0.0 0.0 0.0 Net Investing CF (29.2) (88.7) (17.5) (23.5) (10.5) Div Paid (48.9) (54.8) (60.0) (64.7) (68.7) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 2.59 0.0 0.0 0.0 Net Financing CF (48.9) (52.2) (60.0) (64.7) (68.7) Currency Adjustments 0.04 0.40 0.0 0.0 0.0 Chg in Cash (4.5) (62.4) (6.0) 20.0 18.2 Opg CFPS (S cts) 4.72 5.14 5.49 5.90 6.25 Free CFPS (S cts) 2.86 (0.7) 3.59 5.63 5.78 Source: Company, DBS Bank
Target Price & Ratings History
1.16 S$ 12-mth Date of Closing S.No. Target Rating 1.11 Report Price Price 4 6 1: 27 Jul 16 0.99 1.09 BUY 1.06 2 2: 29 Aug 16 1.05 1.09 BUY 3 5 3: 26 Sep 16 1.08 1.09 BUY 4: 29 Sep 16 1.07 1.18 BUY 1.01 12 14 5: 04 Oct 16 1.08 1.18 BUY 10 6: 27 Oct 16 1.07 1.19 BUY 0.96 1 13 7: 24 Feb 17 0.96 1.13 BUY 8 9 11 8: 17 Mar 17 0.94 1.13 BUY 7 0.91 9: 10 Apr 17 0.98 1.13 BUY 10: 02 May 17 0.98 1.14 BUY 11: 20 Jun 17 0.98 1.20 BUY 0.86 12: 03 Jul 17 1.00 1.20 BUY Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 13: 10 Jul 17 0.99 1.20 BUY 14: 18 Jul 17 0.99 1.20 BUY Note : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank Analyst: Alfie YEO Andy SIM CFA
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DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 28 Jul 2017 08:58:33 (SGT) Dissemination Date: 28 Jul 2017 09:16:22 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a proprietary position in Sheng Siong Group recommended in this report as of 30 June 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Page 64 Indonesia Company Guide Matahari Putra Prima
Version 6 | Bloomberg: MPPA IJ | Reuters: MPPA.JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 17 Apr 2018
HOLD No more inventory clearance in 2018 Last Traded Price ( 16 Apr 2018): Rp394 (JCI : 6,287.00) Price Target 12-mth: Rp380 (-4% downside) (Prev Rp430) MAINTAIN HOLD. We cut our FY18F net profit forecast by 49% after factoring in a higher interest cost assumption. MPPA’s Analyst inventory clearance along with its price-cutting programme had Tiesha PUTRI +6221 30034931 [email protected] Andy SIM, CFA +65 6682 3718 [email protected] resulted in significant EBIT losses of Rp1.11tr in 4Q17. Our discussion with management suggests that its inventory What’s New clearance programme has come to an end, with inventory days 4Q17 results trailed expectations improving to 68 days in 2017 (vs. 2014-2016 range of 75-85 days). Cut FY18F net profit by 49% for higher interest expense Where we differ: We expect MPPA’s profitability to improve, supported by its cost-cutting efforts in 2017. Looking ahead, Margin should improve in FY18F as management had completed inventory clearance last year MPPA looks to cut the slow-moving SKUs and instead focus on basic necessities as well as save costs by downsizing its stores Maintain HOLD with lower TP of Rp380 gradually. We believe these efforts would translate into better profitability in 2018.
Price Relative Potential catalyst: Stronger same-store sales growth. We expect household spending to improve this year, supported by government stimulus and regional elections. An improvement in same-store sales, along with a leaner management structure and an increase in employee productivity, should pave the way for MPPA to turn profitable in 2018.
Valuation: Forecasts and Valuation FY Dec (Rpbn) 2016A 2017A 2018F 2019F We revise down our DCF-based TP to Rp380/share after Revenue 13,527 12,563 13,143 13,886 factoring in potential share price dilution post rights issue. We EBITDA 525 (1,201) 522 548 Pre-tax Profit 101 (1,670) 26.0 61.0 assume 11.7% WACC and 4% sustainable growth rate in our Net Profit 38.0 (1,243) 19.0 46.0 calculation. Our TP implies 6.1x FY18F EV/EBITDA. Net Pft (Pre Ex.) 38.0 (1,243) 19.0 46.0 Net Pft Gth (Pre-ex) (%) (82.6) nm nm 137.6 EPS (Rp) 7.16 (231) 2.64 6.28 Key Risks to Our View: EPS Pre Ex. (Rp) 7.16 (231) 2.64 6.28 EPS Gth Pre Ex (%) (83) nm nm 138 Intensifying competition with minimarkets or regional Diluted EPS (Rp) 7.16 (231) 2.64 6.28 supermarkets could trigger a price war and offset the impact Net DPS (Rp) 0.0 0.0 0.0 0.0 of the cost-cutting programme. BV Per Share (Rp) 452 218 272 278 PE (X) 55.1 nm 149.2 62.8 PE Pre Ex. (X) 55.1 nm 149.2 62.8 At A Glance P/Cash Flow (X) 3.6 nm 15.9 4.5 Issued Capital (m shrs) 5,378 EV/EBITDA (X) 5.0 nm 6.2 5.1 Mkt. Cap (Rpbn/US$m) 2,119 / 154 Net Div Yield (%) 0.0 0.0 0.0 0.0 Major Shareholders (%) P/Book Value (X) 0.9 1.8 1.4 1.4 Multipolar 50.2 Net Debt/Equity (X) 0.2 1.0 0.2 CASH Prime Star Investment Pte. Ltd. 26.1 ROAE (%) 1.6 (105.9) 1.0 2.3 Free Float (%) 23.7
Earnings Rev (%): 349 (49) 4 3m Avg. Daily Val (US$m) 0.07 Consensus EPS (Rp): (50.9) (0.4) 8.09 ICB Industry : Consumer Services / General Retailers Other Broker Recs: B: 1 S: 6 H: 5 Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P
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WHAT’S NEW 4Q17 results coming in below expectations
4Q17 results trailed expectations; inventory clearance led to also closed down a number of non-performing Foodmart EBIT loss. MPPA stepped up its inventory clearance Express outlets in Kalimantan. Despite stronger commodity programme in 4Q17, resulting in an EBIT loss of Rp1.11tr. It prices and exports last year, the company has yet to see any booked a net loss of Rp858bn in 4Q17 and net loss of significant improvement in its ex-Java outlets. Rp1.24tr in FY17, far higher than our net loss forecast of Revise down FY18F net profit by 49%. We raise our FY18F Rp277bn. Gross margin turned negative in 4Q17 (at -11.9%) gross margin assumption from 15.3% to 17.2% (in line with vs. 3Q17 gross margin of 12.3% due to heavy discounting. management’s target) as we assume no further inventory On the other hand, working capital cycle improved clearance this year. However, we raise our debt and interest significantly to 11 days in 2017 from 20 days in 2016 due to expense assumptions, resulting in a 49% plunge in net profit. faster inventory turnover. We lower our DCF-based TP to Rp380, which has already Revenue in line. Revenue dropped 9% y-o-y (+2% q-o-q) to baked in potential ownership dilution of 27% post the Rp2.95tr in 4Q17. This is in line with our FY17 revenue planned rights issue. forecast of Rp12.56tr (-7% y-o-y). The company closed down five Hypermart outlets in FY17 but added three new stores. It
Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 3,231 2,895 2,952 (8.6) 2.0 Cost of Goods Sold (2,529) (2,540) (3,304) 30.6 30.1 Gross Profit 702 355 (353) nm nm Other Oper. (Exp)/Inc (616) (617) (758) 23.1 22.9 Operating Profit 86.0 (262) (1,111) nm 324.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 0.0 0.0 0.0 nm nm Net Interest (Exp)/Inc (20.0) (29.0) (36.0) nm nm Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm Pre-tax Profit 65.0 (291) (1,147) nm nm Tax (59.0) 75.0 289 nm 283.8 Minority Interest 0.0 0.0 0.0 nm nm Net Profit 6.00 (216) (858) nm 297.5 Net profit bef Except. 6.00 (216) (858) nm 297.5 EBITDA 180 (172) (1,020) nm nm
Margins (%) Gross Margins 21.7 12.3 (11.9) Opg Profit Margins 2.7 (9.1) (37.6) Net Profit Margins 0.2 (7.5) (29.1)
Source of all data: Company, DBSVI, DBS Bank
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Sales per sqm (Rp mn) CRITICAL DATA POINTS TO WATCH
Critical Factors
Store productivity. We think that competition among hypermarket operators in the Greater Jakarta area has been intensifying, with operators revamping stores and pushing promotions to boost demand. The growing number of convenience stores also adds to the competitive pressure. We think this could potentially impede the company’s revenue growth going forward, as growth in sales productivity per sqm has become harder to achieve (which was evident in the last three years). We estimate revenue to grow at a Retail space (sqm) CAGR of 5.1% over FY17-19F, driven mostly by improvement in same-store sales (we project 4% SSSG in FY18F-19F).
Economic recovery in ex-Java cities. MPPA is looking to further strengthen its foothold in underpenetrated ex-Java cities. Around 131 stores, or 45% of MPPA’s total stores, are located outside Java. The performance of MPPA’s ex-Java stores, particularly in Sumatera and Kalimantan, was weak in 2016. Given the high dependency of the ex-Java economy on commodity prices, the recent rally in commodity prices may help support consumers’ purchasing power, Same store sale growth trend hence leading to better performance by MPPA’s ex-Java stores. 8.0%
6.0% 5.4% 4.6% Significant contribution from marketing income. MPPA has a 4.1% 4.1% negative marketing expense item booked under its operating 4.0% expenses. This is essentially marketing income which is earned from 2.0% advertising fees (through brochures and pamphlets) as well as 0.0% supplier rebates and discounts. We note that marketing income’s 13A 14A 15A 16A 17F 18F 19F contribution to operating income has been increasing, i.e. 51% in -2.0% -1.9% 2013 to 333% in 2016. We view this increasing dependency -4.0% negatively as it reduces earnings visibility and presents risks. In -4.5% FY16, marketing income accounts for 4.2% of MPPA’s gross sales. -6.0% Furthermore, part of it is uncollectible, causing MPPA to book an -8.0% -6.9% account receivable impairment amounting to Rp67bn in FY17. We assume an impairment of Rp35bn for FY18F or 0.3% of gross sales. Margin trend and forecasts % Gross margin EBIT margin Our sensitivity analysis shows that a 10bps move in account 20 16.4 17.0 17.2 17.2 receivable impairment/gross sales would impact MPPA’s bottom 15 line by 53%. 10 8.0
5 2.21.6 1.3 0.3 1.1 0.1 1.00.3 0
-5
-10 -9.9 -15 -12.4 15A 16A 17F 18F 19F
Source: Company, DBSVI, DBS Bank
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Appendix 1: A look at Company's listed history – what drives its share price?
MPPA share price vs. peers Oct 6, 2010 = 100 MPPA (LHS) MPPA vs. Consumer Sector (RHS) 5,000 1.40 4,500 1.20 4,000 A2 3,500 1.00 3,000 0.80 2,500 B 0.60 2,000 A1 1,500 0.40 1,000 0.20 500 0 - Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Source: Bloomberg Finance L.P, DBSVI, DBS Bank
A: Store productivity B: Profitability MPPA’s shares move in line with its store productivity. This was We have also seen a growing correlation between MPPA’s share evident in 2010-2011 and 2015-2016, when the decline in price and its profitability since 2015. The subsequent chart store productivity caused the share price to fall in 2010-2011 shows that MPPA’s share price had de-rated in 2015 to 1Q17, and 2015-2016. An increase in productivity, driven by prudent as intensifying competition and operating deleverage crimped new store openings or market share gain, led to a share price its EBIT margin. rally, as shown in 2014.
MPPA’s share price vs. store productivity MPPA’s share price vs. EBIT margin 5,000 20.0 5,000 10.0 4,500 19.5 4,500 8.0 4,000 19.0 4,000 6.0 3,500 18.5 3,500 4.0 18.0 3,000 3,000 2.0 17.5 2,500 2,500 0.0 17.0 2,000 2,000 -2.0 16.5 1,500 -4.0 1,500 16.0 1,000 -6.0 1,000 15.5 500 15.0 500 -8.0 - 14.5 - -10.0
MPPA share price (LHS) Sales/sqm, Rp mn (RHS) MPPA share price (LHS) EBIT margin, % (RHS) Source: Bloomberg Finance L.P, DBSVI, DBS Bank Source: Bloomberg Finance L.P, DBSVI, DBS Bank
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Leverage & Asset Turnover (x) Balance Sheet:
Asset-light business model. MPPA has an asset-light business model as it does not own its establishments, but lease them from either affiliated or third parties. As at end-Dec 2017, MPPA’s net and gross gearing was 1x and 1.3x, respectively.
Share Price Drivers:
Recovery in consumer spending. Any signs of recovery in the domestic economy or consumer spending (i.e. reflected in a Capital Expenditure strong Consumer Confidence Index) will fuel expectations of Rpbn stronger revenue and earnings growth. This would lead to more positive investor sentiment towards MPPA, thus boosting its share price.
Key Risks:
Weakness in domestic consumption. Lower consumer spending would naturally reduce the company’s revenue. Furthermore, consumers tend to hold off purchases of durable goods, such as electronics, gadgets, and household equipment, which typically carry higher margins. This could ROE (%) lead to margin contraction for MPPA.
Intensifying competition. Rising competition against minimarkets, hypermarkets or regional supermarkets may force MPPA to cut its selling price further in order to retain its price- sensitive customers. This will offset the impact of MPPA’s cost- cutting programme.
Company Background Forward PE Band (x) Matahari Putra Prima is a mass grocery retail store operator in Indonesia. Its store formats include hypermarkets under the name “Hypermart”, supermarkets under “Foodmart”, as well as health and beauty stores under “Boston Health & Beauty”. More than 90% of the company’s revenue is derived from its hypermarket stores, and currently, it is the second-largest hypermarket store operator in Indonesia, with 25% market share in terms of retail value.
PB Band (x)
Source: Company, DBSVI, DBS Bank
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Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F Sales per sqm (Rp mn) 20.0 18.0 17.0 18.0 19.0 Retail space (sqm) 734,862 767,807 760,865 772,395 783,924 SSSG (%) (2.0) (5.0) (7.0) 4.00 4.00
Segmental Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F
Revenues (Rpbn) Cost of consignment Direct sales 13,713 13,436 12,465 13,040 13,777 Consignment sales 711 661 673 704 744 Others (622) (570) (575) (602) (636) Total 13,802 13,527 12,563 13,143 13,886 Gross profit (Rpbn) Direct sales 2,180 2,202 905 2,152 2,273 Net revenue Consignment sales 89.0 92.0 98.0 103 108 Others Total 2,269 2,294 1,003 2,254 2,382 Inventory clearance sales on Gross profit Margins (%) discretionary items led to Direct sales 15.9 16.4 7.3 16.5 16.5 lower margins Consignment sales 12.5 13.8 14.6 14.6 14.6 Others Total 16.4 17.0 8.0 17.2 17.2
Income Statement (Rpbn) Expect margins to normalise FY Dec 2015A 2016A 2017A 2018F 2019F post one-off inventory Revenue 13,802 13,527 12,563 13,143 13,886 clearances Cost of Goods Sold (11,534) (11,233) (11,560) (10,888) (11,504) Gross Profit 2,269 2,294 1,003 2,254 2,382 Other Opng (Exp)/Inc (1,961) (2,117) (2,562) (2,111) (2,237) Operating Profit 307 177 (1,559) 143 145 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (36.0) (76.0) (110) (118) (83.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 272 101 (1,670) 26.0 61.0 Tax (50.0) (63.0) 426 (6.0) (15.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Factor higher interest costs Preference Dividend 0.0 0.0 0.0 0.0 0.0 due to higher-than-expected Net Profit 222 38.0 (1,243) 19.0 46.0 debt quantum Net Profit before Except. 222 38.0 (1,243) 19.0 46.0 EBITDA 617 525 (1,201) 522 548 Growth Higher interest costs arising Revenue Gth (%) 1.6 (2.0) (7.1) 4.6 5.7 from more gross debt EBITDA Gth (%) (36.8) (14.9) nm nm 5.0 Opg Profit Gth (%) (56.8) (42.4) (980.7) (109.2) 0.8 Net Profit Gth (Pre-ex) (%) (60.0) (82.6) nm nm 137.6 Margins & Ratio Gross Margins (%) 16.4 17.0 8.0 17.2 17.2 Opg Profit Margin (%) 2.1 1.3 (11.9) 1.0 1.0 Net Profit Margin (%) 1.5 0.3 (9.5) 0.1 0.3 ROAE (%) 8.8 1.6 (105.9) 1.0 2.3 ROA (%) 3.7 0.6 (22.9) 0.3 0.8 ROCE (%) 7.2 1.9 (51.3) 3.2 3.2 Div Payout Ratio (%) 63.1 0.0 N/A 0.0 0.0 Net Interest Cover (x) 8.6 2.3 (14.1) 1.2 1.7 Source: Company, DBSVI, DBS Bank
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Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 3,231 3,101 3,616 2,895 2,952 Cost of Goods Sold (2,529) (2,667) (3,048) (2,540) (3,304) Gross Profit 702 433 568 355 (353) Other Oper. (Exp)/Inc (616) (651) (537) (617) (758) Operating Profit 86.0 (218) 31.0 (262) (1,111) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (20.0) (20.0) (25.0) (29.0) (36.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 65.0 (238) 6.00 (291) (1,147) Tax (59.0) 61.0 1.00 75.0 289 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 6.00 (177) 7.00 (216) (858) Net profit bef Except. 6.00 (177) 7.00 (216) (858) EBITDA 180 (128) 119 (172) (1,020)
Growth Revenue Gth (%) (4.2) (4.0) 16.6 (19.9) 2.0 EBITDA Gth (%) 37.2 nm nm nm nm Opg Profit Gth (%) 98.6 (353.7) (114.3) (940.2) 324.0 Negative gross margin as Net Profit Gth (Pre-ex) (%) (22.9) (3,087.7) (103.9) (3,230.4) 297.5 MPPA held inventory Margins clearance on discretionary Gross Margins (%) 21.7 14.0 15.7 12.3 (11.9) items Opg Profit Margins (%) 2.7 (7.0) 0.9 (9.1) (37.6) Net Profit Margins (%) 0.2 (5.7) 0.2 (7.5) (29.1)
Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 1,462 1,576 1,486 1,316 1,131 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 861 1,024 1,455 1,455 1,455 Cash & ST Invts 409 249 373 649 1,068 Inventory 2,498 2,747 1,582 2,496 1,812 Debtors 26.0 47.0 68.0 60.0 63.0 Other Current Assets 777 1,060 463 463 463 Total Assets 6,033 6,702 5,427 6,438 5,993 Inventory clearance impact ST Debt 250 140 1,490 990 990 Creditor 1,763 2,318 1,411 2,101 1,610 Other Current Liab 801 876 975 975 975 LT Debt 400 610 0.0 0.0 0.0 Higher debt quantum led to Other LT Liabilities 304 328 377 377 377 higher interest rates Shareholder’s Equity 2,514 2,430 1,174 1,995 2,041 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 6,033 6,702 5,427 6,438 5,993 Inventory clearance significantly improved cash Non-Cash Wkg. Capital 736 660 (273) (57.0) (246) conversion cycle Net Cash/(Debt) (241) (501) (1,117) (341) 78.0 Debtors Turn (avg days) 0.8 1.0 1.7 1.8 1.6 Creditors Turn (avg days) 57.9 66.3 58.9 58.9 58.9 Inventory Turn (avg days) 76.8 85.2 68.3 68.3 68.3 Asset Turnover (x) 2.4 2.1 2.1 2.2 2.2 Current Ratio (x) 1.3 1.2 0.6 0.9 1.0 Quick Ratio (x) 0.2 0.1 0.1 0.2 0.3 Net Debt/Equity (X) 0.1 0.2 1.0 0.2 CASH Net Debt/Equity ex MI (X) 0.1 0.2 1.0 0.2 CASH Capex to Debt (%) 65.0 53.2 18.0 21.0 22.1 Z-Score (X) 3.4 2.9 2.6 2.6 2.9 Source: Company, DBSVI, DBS Bank
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Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 272 101 (1,670) 26.0 61.0 Dep. & Amort. 309 347 358 378 403 Tax Paid (50.0) (57.0) (63.0) (6.0) (15.0) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (559) 104 982 (216) 189 Other Operating CF (114) 87.0 250 0.0 0.0 Working capital cashflow Net Operating CF (141) 583 (143) 182 638 benefit from flushing out Capital Exp.(net) (422) (399) (268) (208) (219) inventory Other Invts.(net) (32.0) (158) (121) 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (129) (71.0) 14.0 0.0 0.0 Imminent rights issue and Net Investing CF (583) (628) (376) (208) (219) dilution impact of c.27% to Div Paid (231) (140) 0.0 0.0 0.0 embark on transformation Chg in Gross Debt 650 100 740 (500) 0.0 and new growth strategy Capital Issues 0.0 0.0 0.0 802 0.0 Other Financing CF (33.0) (75.0) (97.0) 0.0 0.0 Net Financing CF 385 (115) 643 302 0.0 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (339) (160) 124 276 419 Opg CFPS (Rp) 77.6 88.9 (209) 54.2 61.3 Free CFPS (Rp) (105) 34.2 (76.4) (3.5) 57.1 Source: Company, DBSVI, DBS Bank
Target Price & Ratings History
Source: DBSVI, DBS Bank Analyst: Tiesha PUTRI Andy SIM, CFA
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DBSVI, DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 17 Apr 2018 06:48:07 (WIB) Dissemination Date: 17 Apr 2018 08:04:41 (WIB)
Sources for all charts and tables are DBSVI, DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by PT DBS Vickers Sekuritas Indonesia (''DBSVI''), DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PT DBS Vickers Sekuritas Indonesia (''DBSVI''), DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 30 Mar 2018. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 74 Regional Company Guide Robinsons Retail Holdings Version 9 | Bloomberg: RRHI PM | Reuters: RRHI.PS Refer to important disclosures at the end of this report
DBS Group Research . Equity 29 March 2018
HOLD (Downgrade from BUY) Hardly a game changer Last Traded Price ( 28 Mar 2018): P89.30 (PCOMP : 7,979.83) Downgrade Robinsons Retail Holdings (RRHI) to HOLD, TP Price Target 12-mth: P87.00 (3% downside) (Prev P107) trimmed to P87.00. We cut our EPS estimates by 7%/10% for Analyst FY18F/19F as we consolidate in our forecast the acquisition of Regional Research Team [email protected] the loss-making Rustans and the earnings dilution that comes What’s New along with the deal. We view the deal to be negative in the RRHI acquires Rustans – hardly a game changer near-to-medium term but constructive in the long term. We expect positive impact on RRHI’s earnings to be felt the earliest Earnings cut on lower margins, ROE drops after in FY20. This acquisition is significant relative to the previous folding in Rustans acquisition but is not a game changer. Furthermore, we adjust FY17 earnings is behind our and consensus our estimates to reflect earnings pressure stemming from the estimates increasing competition in the retail mall space. Our TP is based on SOTP valuation and implies 25x/22x FY18F/19F PE – in line Downgrade to HOLD, TP cut to P87.00 with regional peer average.
Price Relative Where we differ: Our FY18F/FY19F EBIT forecasts are 3%/6% P Relative Index behind consensus estimates as we factor in the impact of the
214 111.3 acquisition of Rustans and increasing competition from retail 194 101.3 174 mall operators. We are of the view that the acquisition is 91.3 154 positive for the long term but negative in the near-to-medium 81.3 134 71.3 term. The acquisition may take some time to have a more 114 61.3 94 meaningful impact on RRHI’s earnings. It is a significant 51.3 74 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 acquisition but not a game changer.
Robinsons Retail Holdings (LHS) Relative PCOMP (RHS) Potential catalysts: 1) faster SSSGs; 2) M&A activities; 3) Forecasts and Valuation speedier store expansion; 4) faster turnaround of Rustans, and FY Dec (P m) 2016A 2017A 2018F 2019F Revenue 105,293 115,239 133,868 165,577 5) significant margin improvement on minimal store closures EBITDA 7,964 8,618 9,695 11,019 and cost control. Pre-tax Profit 6,667 7,304 7,948 8,699 Net Profit 4,830 4,980 5,515 6,035 Valuation: Net Pft (Pre Ex.) 4,830 4,980 5,515 6,034 EPS (P) 3.49 3.60 3.50 3.83 HOLD, cut TP to P87.00, based on SOTP valuation EPS Pre Ex. (P) 3.49 3.60 3.50 3.83 methodology. Our TP implies FY18F/19F PE of 25x/22x. EPS Gth (%) 11 3 (3) 9 EPS Gth Pre Ex (%) 11 3 (3) 9 Key Risks to Our View: Diluted EPS (P) 3.49 3.60 3.50 3.83 Key risks to our forecast are: 1) competition intensifying more Net DPS (P) 0.68 0.75 0.68 0.75 BV Per Share (P) 34.4 37.2 46.9 50.0 than assumed; 2) fewer number of new store rollouts; 3) more PE (X) 25.6 24.8 25.5 23.3 closures of non-performing stores, and 4) negative surprise PE Pre Ex. (X) 25.6 24.8 25.5 23.3 from the acquisition of Rustans. P/Cash Flow (X) 20.0 19.0 14.9 13.8 EV/EBITDA (X) 15.1 13.8 13.6 11.5 Net Div Yield (%) 0.8 0.8 0.8 0.8 At A Glance P/Book Value (X) 2.6 2.4 1.9 1.8 Issued Capital (m shrs) 1,385 Net Debt/Equity (X) CASH CASH CASH CASH Mkt. Cap (Pm/US$m) 123,681 / 2,365 ROAE (%) 10.6 10.0 8.8 7.9 Major Shareholders (%) Earnings Rev (%): (7) (10) JE Holdings Sdn Bhd 35.0 Consensus EPS (P): 4.2 4.7 Gokongwei Lance Yu 11.7 Other Broker Recs: B: 15 S: 0 H: 3 Gokongwei PE Robina Y 7.7 Free Float (%) 45.7 Source of all data on this page: Company, DBS Bank, Bloomberg 3m Avg. Daily Val (US$m) 1.5 Finance L.P ICB Industry : Consumer Services / General Retailers
ed: TH / sa: CS/AS /AH Page 75 Company Guide Robinsons Retail Holdings
WHAT’S NEW A big acquisition but not a game changer
The merger, details thus far. RRHI announced on 23 March Who is Rustan? 2018 that it will enter a share-swap deal with Dairy Farm Rustan Supercenters, Inc. (RSCI, Rustan) is a member of Dairy International (LSE: DFIB). The transaction will involve DFIB 1) Farm Group – a leading Pan-Asian retailer incorporated in selling 100%-ownership stake in Rustan Supercenters, Inc. Bermuda (with standard listing in London Stock Exchange and (RSCI, Rustan), valued at about P18bn, in exchange for secondary listings in Bermuda and Singapore), which operates 12.15% new RRHI shares worth US$346m; and, 2) over 7,100 multi-format outlets in Hong Kong, Taiwan, subscribing to an additional 6.1% stake in RRHI shares worth China, Macau, Singapore, India, the Philippines, Cambodia, US$174m. Both share sales are valued at P94 per RRHI share, Brunei, Malaysia, Indonesia and Vietnam. a 2.9% premium to RRHI’s share price of P91.35 as of 14 March 2018 (when the key terms for the transactions were Rustan runs Rustan’s Supermarkets, the Shopwise chain of agreed). hypermarkets and Wellcome. Catering to upper-middle markets in major urban centres, Rustan’s Supermarket is an Post-transaction, DFIB will effectively own an 18.25% stake in established retailer known for its offering of high-quality RRHI – a 12.15% stake will arise from the sale of RSCI, while products from exclusive international brands as well as fresh the remaining 6.1% stake will come from Gokongwei’s sales local produce. Shopwise, on the other hand, operates a of shares (which will be funded by DFIB through internal cash number of hypermarkets with various affordable and quality and bank borrowings). With the resulting exchange in equity, offerings, while Wellcome is a Hong Kong-based supermarket DFIB will have rights to two board seats in RRHI, while chain with strong presence in Taiwan and a growing number Gokongwei’s stake will be reduced from 65% to 51% post- of stores in the Philippines. As of 2017, RSCI manages 73 share sale and equity dilution. RRHI will take over 100% of stores (56 of which are concentrated in urban Metro Manila), RSCI’s operations by late 2018. with over 441,000 sqm in gross floor area. RSCI’s sales for FY17 reached P22bn (roughly US$440m), but incurred an operating loss of roughly P200m.
Pre- and post-merger ownership structure
Source of all data: Company, DBS Bank
Page 76 Company Guide Robinsons Retail Holdings
Our view. The deal is negative for existing shareholders in the the positive impact on earnings can be felt the earliest in near-to-medium term due to the earnings dilution, lower FY20. margins from having to absorb a loss-making business, and FY17 earnings, behind estimates. RRHI reported 4Q17 net lower ROE. Nevertheless, we see the deal to be constructive profit of P1.49bn (-2.6% y-o-y), bringing its FY17 net income in the long term as it improves RRHI’s competitiveness, to P4.98bn (+3.1% y-o-y) or 94% of our full-year forecast – though not a game changer. We believe management can below our and consensus estimates. 4Q17 revenues grew by turn around Rustan but it will take some time before we see 8.2% y-o-y to P34.1bn, mainly driven by healthy y-o-y meaningful positive impact on RRHI’s earnings. performances and resilient SSSG of the Supermarket, DIY The Good: Improves RRHI’s operations Store, and Specialty Store businesses. Blended SSSG normalised to 2.7% for the full year, which was expected, Improves RRHI’s long-term competitiveness: RRHI’s coming from a high base from an election year (2016 SSSG: market share should improve and close the gap with 6.7%). FY17 consolidated margins expanded with higher Puregold. While there will be some redundancies, we gross profit margin (+40bps to 22.3%) as well as EBIT margin view the merger to be overall complementary and (+30bps to 5.5%). address some of RRHI’s weaknesses. Rustan will improve RRHI’s positioning in Metro Manila and significantly Supermarkets – Net sales for the quarter rose 9.7% y-o-y to boost its premium grocery platform. P15.1bn, boosted by new store additions (+5.5%) and resilient SSSG (2.5%), bringing FY17 net sales to P52.4bn Synergies with Rustan and Dairy Farm. We could see (+8% y-o-y). EBITDA for 4Q17 increased faster by 10.7% y-o- margins expand due to economies of scale. The deal y. EBITDA for the full year was up 6.1% y-o-y to P3.7bn, but improves RRHI’s bargaining power over suppliers due to with a 10-bp margin contraction to 7%. The segment ended larger order sizes (based on FY17 numbers, Rustan will the year with a total of 154 stores (+14 stores y-o-y). increase RRHI’s supermarket revenues by ~55%). Centralised distribution centres and IT system to improve Department Stores – 4Q17 revenues came in at P5.5bn, weak profitability of Rustan as well as enhance overall margins. with only 2.1% y-o-y growth. With 4Q17 sales unable to And lastly, we think that RRHI could transfer operational boost FY17 segment revenues, full-year top line registered best practices to Rustan and could have access to Dairy flat growth of 1.8% y-o-y to P16.1bn. 4Q17 fall in SSSG (- Farm’s core competence. 4.1%) dragged full-year SSSG figures (-2.6%) amid high-base effects following 2016’s election-related spending, prolonged The Bad: Near- to medium-term pain for existing shareholders decrease in GFA (due to massive renovation of Robinsons Earnings cut and lower margins. Rustan is a loss-making Galleria), and a generally strong competitive landscape. business. The company continued to post losses in FY17, Unexciting gross profit numbers (+3% y-o-y to 4.2bn) for roughly around P200m in EBIT loss. Based on the most FY17 likewise failed to arrest increased operating costs, recent filing with the Securities and Exchange leading to a 14.6% y-o-y decline in EBITDA to P0.98bn and a Commission (SEC), Rustan’s net loss for FY15 was 110-bp contraction in EBITDA margins to 6.1%. Department P307m or around 5.6% of our FY18F earnings forecast. store network count increased to 49, with net store addition After folding in Rustan into our estimates, it resulted in of six y-o-y. lower margins and earnings cut of 7%/10% for DIY Stores – Sales for the quarter was 8.4% higher y-o-y at FY18F/19F – also taking into account lower earnings P3.5bn, supported by strong SSSG of 6.1%. Still benefitting from department stores. from a growing residential market, full-year GP/EBITDA Dilution and lower ROE. Post-transaction, we estimate improved by +12.6%/+13% y-o-y to P3.9bn/P1.2bn. Store the number of shares to increase by 191m, resulting in count at the end of the year was 193 (+15 y-o-y). earnings dilution and lower ROE. The deal is positive for Convenience Stores – Following three net store closures in the long term but will not be earnings accretive, at least FY17, the ratio of franchised to company-owned stores in the next three years. Our FY19F ROE drops to 7.7% improved to 46:54. Sales in 4Q17 grew by 2.4% y-o-y to from 10.4% pre-merger. P2.3bn, with 2.8% SSSG from sustained demand from ready- The Uncertain: Turnaround story but a matter of when it will to-eat category. FY17 GP (including royalty income) however happen declined by 0.9% y-o-y to P2.3bn, with a 60-bp margin contraction to 39.8%. Amid store rationalisation, EBITDA When can RRHI turn around Rustan? We acknowledge likewise declined 5% y-o-y to P303m. EBITDA margin was at RRHI’s ability to turn around losing businesses. However, 5.3% (-30bps y-o-y). we think Rustan will be quite a challenge. Taking into account Rustan’s size, there are bound to be Drugstores – Following acquisition of The Generics Pharmacy redundancies and potential for negative surprises. Upon (TGP), FY17 sales came in stronger by 21.6% y-o-y to takeover, we think management will hold off expanding P14.5bn. SSSG (for South Star Drug only) was however weak Rustan and focus on cutting operating costs. We believe at 1.6%, mainly due to replenishment issues following the
Page 77 Company Guide Robinsons Retail Holdings
segment’s migration to a new merchandising system in 2H17. performance across most formats. 4Q17/FY17 SSSG of Nonetheless, GP/EBITDA improved by 31.1%/54.2% y-o-y to 6.4%/7.8% were driven by appliances, beauty, and Daiso P2.7bn/P1.1bn. RRHI’s drugstore network reached 2,499 in Japan. For FY17, GP/EBITDA improved by 18.6%/36.4% y-o-y FY17 – South Star Drug’s store count increased by 75 stores to P4.1bn/P1.1bn. Total store count was at 342 (+36 stores y- y-o-y, while TGP’s network grew by 103 in the interim. o-y). Specialty Stores – Sales generated during the quarter reached P5bn, a 12.4% growth y-o-y, on the back of robust sales
Quarterly / Interim Income Statement (Pm) FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 31,481 27,695 34,058 8.2 23.0 Cost of Goods Sold (24,422) (21,424) (26,558) 8.7 24.0 Gross Profit 7,059 6,270 7,501 6.3 19.6 Other Oper. (Exp)/Inc (5,206) (4,763) (5,419) 4.1 13.8 Operating Profit 1,853 1,508 2,081 12.3 38.1 Other Non Opg (Exp)/Inc 132 41.9 (35.9) nm nm Associates & JV Inc 15.4 40.1 18.9 22.8 (53.0) Net Interest (Exp)/Inc 181 188 181 (0.2) (3.9) Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Pre-tax Profit 2,182 1,778 2,245 2.9 26.3 Tax (513) (421) (541) 5.5 28.7 Minority Interest (140) (147) (216) (54.3) 46.2 Net Profit 1,529 1,209 1,488 (2.6) 23.2 Net profit bef Except. 1,529 1,209 1,488 (2.6) 23.2 EBITDA 2,608 2,082 2,561 (1.8) 23.1 Margins (%) Gross Margins 22.4 22.6 22.0 Opg Profit Margins 5.9 5.4 6.1 Net Profit Margins 4.9 4.4 4.4
Source of all data: Company, DBS Bank
Page 78 Company Guide Robinsons Retail Holdings
GFA growth %
9.7 CRITICAL DATA POINTS TO WATCH 9.8 Growth via organic GFA expansion. RRHI’s store network grew 8.4 8 by 332 stores, representing a 10% increase in gross floor area 7.3 7.4 7.0 6.8 (GFA) in FY17. This resulted in revenue growth of 9.4% y-o-y in 5.6 FY17. Moving into FY18F/FY19F, we expect fewer store closures 4.2 and GFA to expand 7.4%/6.8% - excluding M&A. These should support revenue growth and steady/improve operating margins 2.8 1.4
0.0 Consumer confidence is key. SSSG is normalising at the 2-3% 2015A 2016A 2017A 2018F 2019F level. SSSG should pick up as consumer confidence should be stronger after the passage of package 1 of the tax reform Same-store-sales growth % programme – which lowers income tax rates of the working- 6.8 6.7 class population. The law has taken effect from 1 January 2018 and should benefit RRHI’s target market – the middle-income 5.5 4.1 households. Based on our analysis of the said law, the middle- 4.1 income households will enjoy the highest wealth effect relative 3 3 3 to income levels. We acknowledge that the law is inflationary. 2.7
However, RRHI’s target market is less sensitive to inflation. 1.4 Furthermore, given the high approval rating of President 0.0 Duterte amid his controversial war on drugs and anti-western 2015A 2016A 2017A 2018F 2019F comments, we see no reason for consumer confidence to Source: Company, DBS Bank deteriorate in the near-to-medium term. Against this backdrop, RRHI is best positioned to benefit given its broad and countrywide exposure in the Philippine modern retail space.
Acquisitions and expansion into other retail formats. RRHI continues to be on a lookout for value-enhancing acquisitions and opportunities to expand its retail format. So far, RRHI has made one acquisition each in 2016, 2017, and 2018. RRHI announced the purchase of 51% of The Generics Pharmacy in 2016 and 20% of Taste Central (operator of Beauty Manila) in 2017, and acquired Rustan in 2018 via a share swap transaction. We see RRHI announcing at least one acquisition in FY19F. RRHI has a large war chest that is more than enough to fund a large and high-profile M&A. We have not assumed any acquisitions in our FY18F-19F earnings forecasts.
Industry backdrop is supportive of growth. Low penetration of modern retail (25% overall and 30% grocery based on Euromonitor data as of end-2016), rising household disposable income (6.2% CAGR in FY00-16) which is underpinned by growth in jobs, lower income tax rates, and increase in compensation of government employees moving forward, and favourable demographics are factors supporting store expansion in the Philippine modern retail space. We think Duterte’s administration will allocate more resources to Visayas and Mindanao. These are areas where modern retail is very much underpenetrated and where RRHI is ahead relative to its main competitors.
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Appendix 1:
Inflation as critical factor Remarks
(P) (%) 120 5.0 While RRHI’s target market is less sensitive to price
100 4.0 increases, inflation still remains a big risk for consumer stocks as far as discretionary spending is 80 3.0 concerned.
60 2.0
40 1.0
20 0.0
0 -1.0 2013 2014 2015 2016 2017
RRHI Share Price Performance (LHS) PH Inflation (RHS) SSSG as critical factor Remarks
(P) (%) 120 10.0 SSSG is reflective of overall consumer confidence 9.0 110 8.0 and consumption spend; it is however affected by increased competition among fellow retailers. 100 7.0 6.0 90 5.0 4.0 80 3.0 70 2.0 1.0 60 0.0
RRHI Share Price Performance (LHS) SSSG (RHS) Share price movement (5-year historical trends) (P)
110 Dec-17: Invested in Sep-17: Replaces online beauty brand EDC on PSEi (BeautyMNL) operator
100
Apr-15: Announces launch of Robinsons May-16: Acquired 90 Galleria Cebu 51% stake in TGP Apr-17: Opens two Nov-17: Negative Jun-15: Launch of malls in Leyte 3Q17 net Costa Coffee Oct-14: Robonsons income on low Mar-18: 80 Supermarket marks household Announced 100th store milestone consumption share-swap txn with Dairy Aug-16: Buys Farms (DFI) in 70 majority stake in exchange for De Oro Pacific 100% ownership of RSCI 60 Jun-14: Acquired Chavez Pharmacy, a drugstore chain in Batangas Jan-16: Earmarks P5bn to put Jan-14: Acquired up 200 stores in 2016 50 Jaynith's Supermarket Nov-13 Mar-14 Jul-14 Dec-14 Apr-15 Aug-15 Jan-16 May-16 Sep-16 Feb-17 Jun-17 Oct-17 Mar-18
Robinsons Retail Holdings, Inc. (RRHI) Share Price Performance Source: Thompson Reuters, Company
Page 80 Company Guide Robinsons Retail Holdings
Leverage & Asset Turnover (x) 0.25 1.5
Balance Sheet: 0.20 1.5 Inundated with cash. RRHI has been in a net cash position since its IPO. Even with its aggressive expansion plans, capex can be funded 0.15 1.5 with internally generated cash. RRHI ended 2017 with negative cash 0.10 1.4 conversion cycle (CCC) days at –4.9 days. 0.05 1.4
0.00 1.4 Share Price Drivers: 2015A 2016A 2017A 2018F 2019F Operating margin turnaround. We expect closures of non-performing Gross Debt to Equity (LHS) Asset Turnover (RHS) stores to taper off further in FY18F. Operating margins appear to Capital Expenditure have improved y-o-y in the last seven quarters. Having said this, we Pm 3,400.0 project operating margins to gradually improve in FY18F and FY19F. 3,350.0 However, with the consolidation of loss-making Rustan, we see 3,300.0 3,250.0 margins to be under pressure in FY18F and FY19F. 3,200.0 3,150.0 Rustan’s turnaround. We do not doubt the ability of RRHI’s 3,100.0 3,050.0 management to turn around the loss-making businesses. However, 3,000.0 we think Rustan will be challenging for RRHI’s management given its 2,950.0 2015A 2016A 2017A 2018F 2019F size. There are bound to be redundancies as well as potential for Capital Expenditure (-) negative surprises. ROE (%)
Key Risks: 10.0% Expansion constraints plus competition. Availability of space (right 8.0% size and location), rental cost, and securing business permits
(especially in areas where local retailers have deep roots within the 6.0% community) are critical factors to the success of RRHI’s expansion 4.0% plans. The current level of competition, stemming from big-chain players and local mom-and-pop retailers, pose extra challenges to 2.0% RRHI expansion plans. 0.0% 2015A 2016A 2017A 2018F 2019F Closure of non-performing stores erodes margins. There is the possibility of more store closures in FY18F, especially in RRHI’s Forward PE Band (x) (x) weaker segments - department stores, convenience stores, and 32.6 specialty stores. Significant markdowns and closing costs are 30.6 detrimental to margins. 28.6 +2sd: 28.5x 26.6 +1sd: 25.8x 24.6
Company Background 22.6 Avg: 23.2x Robinsons Retail Group (RRHI) is a holding company which is solely 20.6 -1sd: 20.6x 18.6 involved in the retail business. The company operates retail outlets in -2sd: 18x various channels such as supermarkets, department stores, DIY 16.6 14.6 outlets, convenience stores, drugstores, and specialty stores. Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
PB Band (x)
3.4 (x)
3.2
3.0 +2sd: 2.89x 2.8
2.6 +1sd: 2.66x
2.4 Avg: 2.43x 2.2 -1sd: 2.2x
2.0 -2sd: 1.96x 1.8
1.6 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: Company, DBS Bank
Page 81 Company Guide Robinsons Retail Holdings
Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F GFA growth % 9.70 7.30 8.00 7.40 6.80 Same-store-sales growth 4.10 6.70 3.00 3.00 3.00 % Segmental Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F Revenues (P m) Supermarket 43,238.7 48,465.1 52,363.0 63,848.0 88,409.1 Department Store 14,906.0 15,827.5 16,116.0 18,636.9 20,731.6 Hardware 9,871.8 11,128.6 12,323.0 13,984.6 15,882.2 Convenience Store 5,493.0 5,665.5 5,710.0 5,873.5 6,367.8 Drug Store 8,069.5 11,934.2 14,518.0 16,352.4 18,348.1 Specialty Stores 10,358.6 13,416.1 15,550.0 16,642.9 17,656.4 Adjustments (1,055.1) (1,143.7) (1,341.0) (1,470.1) (1,818.3) Total 90,883 105,293 115,239 133,868 165,577 At the low end of EBIT (P m) management’s guidance Supermarket 2,380.22 2,706.86 2,834.00 3,126.69 3,304.64 Department Store 919.10 844.10 617.00 713.51 793.71 Hardware 747.73 841.96 1,007.00 1,142.78 1,297.85 Convenience Store 6.11 (54.79) 42.00 43.20 46.84 Drug Store 311.48 628.11 987.00 1,111.71 1,247.39 Specialty Stores 373.54 535.72 851.00 910.81 966.28 Adjustments (9.34) (9.08) (33.00) (36.89) (40.07) Total 4,729 5,493 6,305 7,012 7,617 EBIT Margins (%) Supermarket 5.5% 5.6% 5.4% 4.9% 3.7% Department Store 6.2% 5.3% 3.8% 3.8% 3.8% Hardware 7.6% 7.6% 8.2% 8.2% 8.2% Convenience Store 0.1% -1.0% 0.7% 0.7% 0.7% Drug Store 3.9% 5.3% 6.8% 6.8% 6.8% Specialty Stores 3.6% 4.0% 5.5% 5.5% 5.5% Total 5.2 5.2 5.5 5.2 4.6
Page 82 Company Guide Robinsons Retail Holdings
Income Statement (P m) FY Dec 2015A 2016A 2017A 2018F 2019F Revenue 90,883 105,293 115,239 133,868 165,577 Cost of Goods Sold (71,134) (82,267) (89,523) (104,051) (129,054) Gross Profit 19,749 23,026 25,716 29,817 36,523 Other Opng (Exp)/Inc (15,020) (17,533) (19,411) (22,805) (28,906) Operating Profit 4,729 5,493 6,305 7,012 7,617 Other Non Opg (Exp)/Inc 295 331 128 128 128 Associates & JV Inc 40 103 124 124 124 Net Interest (Exp)/Inc 784 741 746 682 827 Exceptional Gain/(Loss) 0 0 0 0 1 Pre-tax Profit 5,848 6,667 7,304 7,948 8,699 Tax (1,271) (1,471) (1,700) (1,754) (1,919) Minority Interest (235) (366) (623) (678) (742) Preference Dividend 0 0 0 0 0 Margins to decline post- Net Profit 4,342 4,830 4,980 5,515 6,035 merger of Rustan Net Profit before Except. 4,342 4,830 4,980 5,515 6,034 EBITDA 6,712 7,964 8,618 9,695 11,019 Growth Revenue Gth (%) 13.0 15.9 9.4 16.2 23.7 EBITDA Gth (%) 14.2 18.7 8.2 12.5 13.7 Opg Profit Gth (%) 5.4 16.2 14.8 11.2 8.6 Net Profit Gth (Pre-ex) (%) 21.9 11.2 3.1 10.7 9.4 Margins & Ratio Gross Margins (%) 21.7 21.9 22.3 22.3 22.1 Opg Profit Margin (%) 5.2 5.2 5.5 5.2 4.6 Net Profit Margin (%) 4.8 4.6 4.3 4.1 3.6 ROAE (%) 10.4 10.6 10.0 8.8 7.9
ROCE (%) 8.0 7.9 7.9 7.3 6.7 Div Payout Ratio (%) 16.8 19.4 20.9 19.5 19.7 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Bank
Page 83 Company Guide Robinsons Retail Holdings
Quarterly / Interim Income Statement (P m) FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 31,481 25,723 27,763 27,695 34,058 Cost of Goods Sold (24,422) (20,004) (21,537) (21,424) (26,558) Gross Profit 7,059 5,719 6,226 6,270 7,501 Other Oper. (Exp)/Inc (5,206) (4,560) (4,669) (4,763) (5,419) Operating Profit 1,853 1,159 1,557 1,508 2,081 Other Non Opg (Exp)/Inc 132 60 62 42 (36) Associates & JV Inc 15 25 40 40 19 Net Interest (Exp)/Inc 181 185 192 188 181 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2,182 1,429 1,851 1,778 2,245 Tax (513) (328) (410) (421) (541) Minority Interest (140) (105) (155) (147) (216) Net Profit 1,529 996 1,286 1,209 1,488 Net profit bef Except. 1,529 996 1,286 1,209 1,488 EBITDA 2,608 1,736 2,156 2,082 2,561 Lacklustre 4Q17 dragged down by weaker department Growth store operations Revenue Gth (%) 23.6 (18.3) 7.9 (0.2) 23.0 EBITDA Gth (%) 30.0 (33.4) 24.2 (3.5) 23.1 Opg Profit Gth (%) 38.3 (37.5) 34.3 (3.2) 38.1 Net Profit Gth (Pre-ex) (%) 19.6 (34.9) 29.1 (6.0) 23.2 Margins Gross Margins (%) 22.4 22.2 22.4 22.6 22.0 Opg Profit Margins (%) 5.9 4.5 5.6 5.4 6.1 Net Profit Margins (%) 4.9 3.9 4.6 4.4 4.4
Balance Sheet (P m) FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 11,149 12,562 13,601 14,283 14,511 Invts in Associates & JVs 3,425 3,424 3,548 3,672 3,796 Other LT Assets 26,783 30,477 30,940 48,940 48,940 Cash & ST Invts 9,764 12,718 14,557 19,789 25,395 Inventory 10,576 13,342 14,847 17,250 21,373 Debtors 1,774 1,988 2,260 2,625 3,247 Other Current Assets 1,688 2,185 2,419 2,419 2,419 Total Assets 65,160 76,695 82,172 108,980 119,680
ST Debt 2,845 6,576 6,318 6,318 6,318 Creditor 14,796 16,797 17,818 20,702 25,650 Other Current Liab 885 1,106 1,199 2,003 2,168 Large war chest that LT Debt 0 0 0 0 0 can be easily Other LT Liabilities 1,129 1,652 1,565 1,565 1,565 liquidated. Additional Shareholder’s Equity 43,524 47,587 51,536 73,978 78,824 P18bn is from the Minority Interests 1,982 2,978 3,736 4,414 5,156 purchase of Rustan Total Cap. & Liab. 65,160 76,695 82,172 108,980 119,680
Non-Cash Wkg. Capital (1,643) (388) 509 (410) (779) Net Cash/(Debt) 6,920 6,142 8,239 13,471 19,077 Debtors Turn (avg days) 6.6 6.5 6.7 6.7 6.5 Creditors Turn (avg days) 76.0 71.9 72.2 69.2 67.2 Inventory Turn (avg days) 51.4 54.4 58.8 57.6 56.0 Asset Turnover (x) 1.5 1.5 1.5 1.4 1.4 Current Ratio (x) 1.3 1.2 1.3 1.5 1.5 Quick Ratio (x) 0.6 0.6 0.7 0.8 0.8 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 109.3 49.4 49.1 49.3 53.4 Z-Score (X) 6.1 5.1 5.5 5.5 5.4
Source: Company, DBS Bank
Page 84 Company Guide Robinsons Retail Holdings
Cash Flow Statement (P m) FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 5,848 6,667 7,303 7,946 8,695 Dep. & Amort. 1,647 (2,038) 2,073 2,430 3,149 Tax Paid (1,268) (1,393) (836) (950) (1,754) Assoc. & JV Inc/(loss) (40) (103) (124) (124) (124) Chg in Wkg.Cap. (1,366) (1,039) (1,198) 116 203 Other Operating CF (372) 4,075 (725) 0 0 Net Operating CF 4,449 6,169 6,493 9,418 10,169 Capital Exp.(net) (3,109) (3,246) (3,103) (3,112) (3,375) Other Invts.(net) (1,359) (531) (409) 0 0 Invts in Assoc. & JV (4,144) (2,180) 0 0 0 Div from Assoc & JV 84 112 0 0 0 Capex can be funded Other Investing CF 1,694 (80) 33 (18,000) 0 by internally generated Net Investing CF (6,835) (5,924) (3,479) (21,112) (3,375) cashflows Div Paid (729) (936) (1,280) (1,073) (1,188) Chg in Gross Debt 2,733 3,731 (258) 0 0 Capital Issues 0 0 0 18,000 0 Other Financing CF 167 (87) 363 0 0 Net Financing CF 2,172 2,709 (1,175) 16,927 (1,188) Currency Adjustments 0 0 0 0 0 Chg in Cash (213) 2,953 1,839 5,232 5,606 Opg CFPS (P) 4.2 5.2 5.6 5.9 6.3 Free CFPS (P) 1.0 2.1 2.4 4.0 4.3 Source: Company, DBS Bank
Target Price & Ratings History
111.00 P 12-mth Date of Closing 106.00 S.No. T arget Rating Report Price Price 101.00 1: 24 Apr 17 80.80 93.00 BUY 6 2: 03 May 17 79.00 93.00 BUY 96.00 3: 15 May 17 80.05 93.00 BUY 4: 18 Jul 17 86.95 101.00 BUY 91.00 4 5: 15 Aug 17 87.50 101.00 BUY 86.00 6: 04 Jan 18 94.30 107.00 BUY 5 81.00 2 1 76.00 3
71.00 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18
Note : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank Analyst: Regional Research Team
Page 85 Company Guide Robinsons Retail Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 29 Mar 2018 10:59:00 (HKT) Dissemination Date: 29 Mar 2018 15:29:55 (HKT) Sources for all charts and tables are DBS Bank unless otherwise specified GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
Page 86 Company Guide Robinsons Retail Holdings
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research 2 report or his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 28 Feb 2018. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 87 Industry Focus ASEAN Grocery Retail
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 17 Apr 2018 11:34:14 (SGT) Dissemination Date: 17 Apr 2018 11:59:31 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
Page 20 Page 88 Industry Focus ASEAN Grocery Retail
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a proprietary positions in the CP ALL, Sheng Siong Group recommended in this report as of 30 Mar 2018. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 21 Page 89 Industry Focus ASEAN Grocery Retail
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
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DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
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For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
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Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
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United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
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United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
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Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
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DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Paul Yong Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 65 6878 8888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 65 65353 418 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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