2Q23F core profit is estimated at Bt1.68bn, +7% YoY off lower interest expenses after refinancing debt but -19% QoQ on seasonality. We cut our 2023F by 7% to factor in the slow revival in Lotus’s sales. We expect stronger 2H23F earnings growth, up YoY and HoH, off lower interest expenses after completing debt refinancing in late April and better operations at Makro and Lotus’s. Maintain Outperform with a new end-2023 DCF TP (WACC of 7% and LT growth of 2.5%) of Bt42 (from 46).
Expect 2Q23F net profit of Bt1.49bn, -5% YoY and -31% QoQ. Excluding extra loss of Bt186mn from early debt repayment expenses at the B2C unit, we estimate 2Q23F core profit at Bt1.68bn, +7% YoY, reflecting lower consolidated interest expense (-7% YoY and -12% QoQ) off debt refinancing and restructuring (lower interest expense at B2C outpacing higher interest expense at B2B), but -19% QoQ on seasonality. It will release results on August 7.
B2B unit (business-to-business, Makro). We estimate 2Q23 core profit at Bt1bn, down 26% YoY and 47% QoQ, hit by 1) higher SG&A/sales from higher expenses for store adjustment to accommodate the O2O business and a more rapid rise in electricity costs than in sales; 2) higher interest expenses with Bt16.8bn more debt allocated to Makro from Lotus’s after debt restructuring.
We estimate 2Q23 EBIT at Bt1.6bn, -11% YoY and -38% QoQ, with EBIT margin (down 50bps YoY) pulled down by higher SG&A/sales. We expect sales to grow 6% YoY from SSS growth of 5% YoY and store expansion, and gross margin to expand 10bps YoY from more high-margin fresh food sales. Noted that food deflation is expected to erode SSS by 1.5-2.0% YoY.
B2C unit (business-to-consumer, Lotus’s). 2Q23 core profit at the B2C unit is expected at Bt680mn, +213% YoY and +273% QoQ, aided by lower interest expenses from: 1) debt refinancing, eliminating the high-cost USD loan; 2) lower debt, with Bt16.8bn debt allocated to Makro after debt restructuring.
We estimate its 2Q23 EBIT at Bt1.7bn, +7% QoQ and flat YoY off stable EBIT margin with controlled SG&A from improved operational efficiency, off last year’s high base in rebranding expenses offsetting this year’s higher electricity costs and a higher gross margin outpacing lower sales. We expect 2Q23 retail sales to slip 3% YoY from the net closure of 89 stores, mostly non-performing small stores (3% of stores in Thailand) and SSS at -1% YoY amid stable gross margin YoY. Food deflation is estimated to erode SSS by 1.5-2.0% YoY and the reduction in store operating hours of 6 hours/day at night for small formats to improve operational efficiency starting in 2Q23 is set to slice another 1% YoY off SSS. We expect rental income to rise 5% YoY off better occupancy and rental rates with a 50bps YoY widening in gross margin.
Earnings revision. We cut our 2023F earnings by 7% to factor in the slow revival in Lotus’s sales in terms of both SSS and store expansion (net closure of 79 stores in 1H23F, mainly non-performing small stores in Thailand).
Key risks are changes in purchasing power and higher costs from inflationary pressure, higher interest rate and new government policies.
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