1Q24 net profit was Bt725mn, -18% YoY but +29% QoQ, missing consensus on weaker gross margin and higher SG&A and we thus cut our 2024F by 7%. After passage of the FY2024 budget at the end of April, we expect the YoY fall in 2Q24F SSS to ease from 1Q24 (though we believe SSS has contracted in the mid-single digits YoY in April to date, close to 1Q24). This plus better margin from improved stock replenishment via adjusting new orders leads us to expect 2Q24F earnings to be flat or fall slightly YoY (QoQ will fall on seasonality). Further acceleration of government budget disbursement will lift 2H24F into YoY growth. We maintain Outperform with an end-2024 DCF TP of Bt18.5 (WACC 7%, LT growth 2.5%).
1Q24 net profit was Bt725mn, -18% YoY but +29% QoQ, 4% below market estimates on lower-than-expected gross margin and higher-than-expected SG&A. Behind the YoY drop was SSS contraction, weaker gross margin from an issue regarding replenishing stock of private brand products and higher SG&A/sales from more store expansion. The rise QoQ was seasonal.
1Q24 highlights. Revenue fell 2% YoY to Bt8.8bn as SSS contraction outpaced new stores. In 1Q24, SSS shrank 5.3% YoY (vs -8.7% YoY in 1Q23 and -12.3% YoY in 4Q23) on: 1) lower sales volume for construction materials - steel (15% of total sales) and roof, wall and cement construction materials (15-20% of total sales) - on muted construction activities upcountry from weak purchasing power and lower government budget disbursement; 2) lower private brand sales from a stock replenishing issue in some stores, pulling private brand sales to total sales down to 23% (vs 24% in 1Q23 and 4Q23); 3) lower steel product prices. The Ministry of Commerce reports that in 1Q24, local steel product prices, using local rebar price and light lip channel steel as a proxy, fell 10% YoY but were flat QoQ. In 1Q24, it opened two new stores (one in Thailand and one in Cambodia), giving it 86 stores (+9% YoY and +2% QoQ) at end-1Q24. Gross margin fell 10bps YoY to 25% on weaker high-margin private brand sales. SG&A/sales grew 240bps YoY to 16.7% off a rise in SG&A (+14% YoY) from expenses from ramping up expansion (two stores in 1Q24 and another three in 2Q24F) and salary adjustment for employees amid lower sales. Interest expenses grew 34% YoY from higher cost of funds. Equity income rose 46% YoY on better earnings from stores in Myanmar.
Earnings revision and outlook. We cut our 2024F by 7%, factoring in: 1) lower gross margin from the stock replenishing issue in 1Q24; 2) higher SG&A expenses to support its more aggressive expansion plan of nine stores (eight in Thailand and one in Cambodia) in 2024F (vs seven expected earlier). In April to date, we believe SSS contracted in the mid single digits YoY, close to 1Q24. After passage of the FY2024 budget at the end of April, disbursement for the rest of 2Q24F will improve and this plus a relatively unchanged steel price YoY off last year’s normal base, will slow the SSS drop in 2Q24F. This plus better margin from improved stock replenishment by adjusting new product orders, will keep earnings flat or only slightly down YoY in 2Q24F (down QoQ on seasonality). Budget disbursement will lift 2H24F to YoY growth.
Key risks are changes in purchasing power, in steel prices and farm income, and new government policies. Key ESG risks are energy management, sustainable products with quality management (E), labor practices and data security (S).
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