CPAXT - 3Q24: Above estimates on gross margin

3Q24 core profit was Bt2.4bn, +40% YoY and +11% QoQ, 14% above estimates on a wider gross margin from more high-margin fresh food products at both B2B and B2C units. This led us to raise our 2024F and 2025F by 5% each. In 4Q24TD, we expect SSS to grow 2-3% YoY (from 1.5-2% YoY in 3Q24), aided in the first week of October by the Bt10,000 cash handout to 14.5mn people and normally (low single digits YoY) the rest of the time. We expect 4Q24F to be this year’s high, up QoQ on seasonality and YoY on higher sales and wider margin. Post amalgamation, we expect synergy to start in 4Q24F, then becoming more clear in 2025-27F. We stay Outperform with a new mid-2025 DCF TP of Bt41 (WACC of 7.1%, LT growth of 2.5%) from Bt40.

3Q24 net profit was Bt1.95bn, +16% YoY but -10% QoQ, in line with market estimates. Excluding Bt458mn non-recurring expenses after tax (Bt258mn FX loss and Bt200mn amalgamation expenses), 3Q24 core profit was Bt2.4bn, +40% YoY and +11% QoQ, 14% above estimates on a wider gross margin than expected. YoY growth was backed by better sales and gross margin (B2B and B2C) amid unchanged SG&A/sales (a drop at B2C balancing a rise at B2B).

3Q24 B2B unit (business-to-business; Makro). B2B core profit was Bt1.3bn, +2% YoY (growing for the first time in six quarters) and +35% QoQ. The YoY growth was backed by: 1) higher sales (+5% YoY) from store expansion with NSA of 0.93mn sqm (+6% YoY, +2% QoQ) at end-3Q24 and SSS at +1.5% YoY with higher fresh food product sales to sales at 41.9% (vs 41.1% in 3Q23) and a rise in omnichannel sales to 23.6% (vs 17.1% in 3Q23); 2) wider gross margin (+70bps YoY) from better margin for fresh food products in Thailand, improvement overseas and in the food service business; 3) higher SG&A/sales (+40bps YoY) from a rise in SG&A (+9% YoY from higher expenses from omni channel and store expansion, but up less than the +16% YoY in 1H24). It observed a faster rise in omnichannel sales than in expenses for the first time in 3Q24.

3Q24 B2C unit (business-to-consumer; Lotus’s). B2C core profit was Bt1.1bn, +143% YoY but -8% QoQ. The YoY jump came from: 1) higher retail sales (+3% YoY) on NSA of 1.8mn sqm (flat YoY) and SSS growth of 2.3% YoY (+2.4% YoY in Thailand and 1.7% YoY in Malaysia), with proportionately more sales of fresh food products to sales of 27.5% (vs 26.8% in 3Q23) and a rise in the proportion of omnichannel sales to 12.5% (vs 9.1% in 3Q23); 2) wider retail gross margin (+70bps YoY), with a better margin in Thailand (+40bps YoY; 84% of sales) and Malaysia (+200bps YoY; 16% of sales) from more high-margin fresh food sales in both countries and a drop in low-margin tobacco & liquor sales in Malaysia;
3) stable rental & service income with permanent NLA of 1.1mn sqm (+3% YoY) at end-3Q24 and occupancy rate at 92-93% (flat YoY) amid a rise in gross margin to 54.9% (vs 52.1% in 3Q23); 4) lower SG&A/sales (-50bps YoY) on a slower rise in SG&A (+1% YoY) than in sales (+3% YoY).

Key risks are changes in government policies and purchasing power. Key ESG risks are energy & waste management, sustainable products (E) and product quality management, labor practices and data privacy (S).