We like HMPRO, which has seen a good move up in SSS in 4Q24TD, with SSS contraction slowing in HomePro to 2-3% YoY (vs -6% YoY in 3Q24) and actual SSS growth in MegaHome at 4-5% YoY (vs -4% YoY in 3Q24), backed by the return of demand after the flooding, plus more government budget disbursement and better purchasing power after the Bt10,000 cash handout. With better SSS, continued store expansion and wider margin, we expect 4Q24F earnings to grow YoY and QoQ. HMPRO is now trading at an attractive 20x 2024PE (below -2S.D. at 22x its 10-year PE) at a time when earnings will grow; it also can be seen as a sector proxy for potential new stimulus, such as a tax break on shopping. We maintain Outperform with a mid-2025 DCF TP (WACC at 7.0% and LT growth rate at 2.5%) of B13.
High Conviction : HMPRO Increasingly attractive risk and reward
Catalyst #1: Sign of SSS improvement in 4Q24TD. In October, SSS seems to have improved from 3Q24, contracting just 2-3% YoY at HomePro (80% of sales), vs -6% YoY in 3Q24, and growing 4-5% YoY at MegaHome (18% of sales), vs -4% YoY in 3Q24, with virtually no change in YoY growth in weekly figures vs. monthly. Underwriting the improvement was better sales upcountry (51% of sales), with sales continuing weak in Bangkok. By region, SSS uplift was led by the north (accounting for 15% of sales for HomePro and more than 20% of sales for MegaHome) where 2% YoY was added to SSS in both formats in October as demand returned after the flooding receded in Chiang Mai and Chiang Rai (where it has four stores, 3% of total stores), followed by the eastern, central and southern regions on better purchasing power after the Bt10,000 cash handout to 14.5mn people in late September, greater government investment budget disbursement off last year’s low base (+164% YoY in October) and more tourists.
HMPRO expects SSS upcountry to further strengthen, led by demand post flooding related to appliances in the first month and renovations and repair for the next 3-6 months, similar to what was seen after the severe flooding in 2011. SSS in Bangkok is expected to improve gradually at end-2024F off a normal base from road construction in front of the HomePro Ratchapruek store since late 2023 (sliced 1% YoY off SSS YTD), and mid-2025F upon the completion of road construction.
Catalyst #2: Expect better earnings in 4Q24F. The higher SSS, the planned opening of four new stores (three HomePro in Mae Sot, Chiang Mai and Phuket, and a MegaHome in Sriracha) and a continued widening in margin from more high-margin private brand sales at both MegaHome and HomePro and controlled SG&A/sales via expansion in the hybrid format (HomePro adjacent to MegaHome, allowing cost sharing) leads us to expect 4Q24F earnings to grow YoY and QoQ.
Catalyst #3: Attractive valuation, with earnings improving and the sector proxy for upcoming stimulus. We see HMPRO as trading at an unjustified level of 20x 2024PE (below -2S.D. at 22x its 10-year PE) in view of its attractive dividend yield of 3.9%, upcoming earnings improvement and as the sector’s proxy for potential new stimulus such as a tax break on shopping. Tax breaks on shopping were approved eight times in 2015-23. The most recent, giving a tax deduction on up to Bt50,000 in purchases, ran from Jan 1 – Feb 15, 2024 and added 1-2% YoY to SSS.
Key risks are changes in purchasing power and new government policies. Key ESG risks are energy & waste management, sustainable products (E) and product quality management, labor practices and data privacy (S).