2Q23 core profit was in line at Bt1.5bn, +8% YoYon lower interest expenses off debt refinancing but -18% QoQ on seasonality. In 3Q23TD, SSS growth is up in the low single digits YoY at the B2B unit but down in the low single digits YoY at the B2C unit (partly from a 1% slip in sales after reducing store hours at night for small formats to improve efficiency in April). We expect 3Q23F earnings to grow YoY and QoQ on lower interest expenses with an estimated average cost of funds below 3.7% p.a. in 3Q23F vs 4.4% p.a. in 3Q22 after completing debt refinancing in April. We rate Outperform with end-2023 DCF TP (WACC of 7% and LT growth of 2.5%) of Bt42.
2Q23 net profit was Bt1.5bn, -4% YoY and -30% QoQ, in line with estimates. Excluding extra loss of Bt185mn from early debt repayment expenses at the B2C unit, 2Q23 core profit was Bt1.5bn, +8% YoY but -18% QoQ. The rise YoY was due to lower consolidated interest expense (-13% YoY and -18% QoQ) off debt refinancing and restructuring (lower interest expense at B2C outpacing higher interest expense at B2B), while the drop QoQ was seasonal. 1H23 DPS is Bt0.18 (XD on Aug 21).
2Q23 B2B unit (business-to-business; Makro). Core profit was Bt1.1bn, -20% YoY, on: 1) higher SG&A/sales (+30bps YoY) 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 (+85% YoY) with Bt16.8bn more debt allocated to Makro from Lotus’s after debt restructuring and -43% QoQ from seasonality. Sales revenue grew 8% YoY on store expansion and SSS growth of 6% YoY. Note that food deflation eroded fresh food SSS (41% of sales) by 1.5% YoY. It opened a new food service store and closed a food shop in 2Q23, giving it 163 stores with net saleable area (NSA) of 0.86mn sq.m. (+4% YoY and +1% QoQ) at end-2Q23. Gross margin fell 10bps YoY to 9.8% as a lower food service margin from pricing to boost sales offset a wider margin at Makro in Thailand from more efficient fresh food.
2Q23 B2C unit (business-to-consumer; Lotus’s). Core profit from the B2C unit was Bt612mn, +182% YoY and +235% QoQ, aided by lower interest expenses (-23% YoY) from: 1) debt refinancing, eliminating the high-cost USD loan; 2) lower debt, with Bt16.8bn debt allocated to Makro after debt restructuring. At the retail unit, SSS contracted 0.9% YoY in Thailand and 12.2% YoY in Malaysia (off last year’s high base for fresh food sales). Note that food deflation eroded fresh food SSS (25% of sales) by 1.5% YoY and a 6-hr daily reduction in store hours at night for small formats in Thailand to improve operational efficiency from April sliced another 1% YoY off SSS. It closed 89 stores (net of openings) in 2Q23, giving it 2,565 stores with NSA of 1.8mn sq.m. (-1% YoY and QoQ) at end-2Q23. For the rental unit, permanent net leasable area (NLA) was 1.07mn sq.m. (+4% YoY but flat QoQ) with occupancy rate of 92% in Thailand and 93% in Malaysia (vs 89% and 91% in 2Q22). Gross margin was 18.0% (flat QoQ) for the retail unit and 54.6% (+80bps QoQ) from higher rental occupancy rates. SG&A/sales rose 40bps YoY to 19.1% on higher utilities costs.
Key risks are changes in purchasing power and higher costs from inflationary pressure, higher interest rate and new government policies.
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