Bangkok--6 Oct--TRIS Rating
TRIS Rating has affirmed the company and senior unsecured debenture ratings of Home Product Center PLC (HMPRO) at "A+" with "stable" outlook. The ratings reflect the company's leading position in the home improvement retailing industry in Thailand, efficient inventory management, and proven record of managing its home improvement centers. The ratings also take into consideration the increasing level of competition among modern home improvement retailers and the current slowdown in the Thai economy.
The "stable" outlook reflects the expectation that HMPRO will remain Thailand's leading home improvement retailer. The company is expected to maintain the leverage at acceptable level while pursuing its growth strategy. HMPRO's ratings and/or outlook could be revised upward if its expansion efforts, in new store formats or in new markets, are successful and generate material contributions to sales and earnings. In contrast, the ratings and/or outlook could be downgraded if more intense competition or a sluggish economy leads to persistent declines in revenues and profitability.
HMPRO is Thailand's leading home improvement retailer. As of September 2015, its major shareholders were Land & Houses PLC (LH; owning 30.2%) and Quality Houses PLC (QH; 19.9%). HMPRO operates two different store formats: Homepro stores and Mega Home stores. A Homepro store, the company's initial format, offers a wide range of home-related products and services in a store area of 3,000-10,000 square meters (sq.m.). A Mega Home store is a large-scale warehouse-style store, designed to serve the needs of contractors, construction project owners, resellers, and end-users. Mega Home store typically has an area of 12,000-20,000 sq.m. During the past few years, HMPRO's aggressive growth strategy drove it to open 9-12 new stores per year during 2012-2014, compared with an average of four new stores per year previously. A shift in consumer preferences towards modern retail outlets has fuelled its expansion.
At the end of September 2015, HMPRO owned and operated 83 stores in total, comprising 21 stores in Greater Bangkok, 55 stores upcountry, one store in Malaysia, plus six Mega Home stores. During the first nine months of 2015, the company opened seven new stores, comprising five HomePro stores and two Mega Home stores. Through its ongoing expansion, HMPRO has established a strong footprint in the modern home improvement retailing industry nationwide.
HMPRO's sales posted a strong growth in 2014, rising by 20% year-on-year (y-o-y) to Bt47,965 million. The growth was attributed to the opening of several new stores and a 5% y-o-y rise in same-store sales. During the first half of 2015, sales continued to increase but at a slower pace. Sales rose to Bt25,535 million in the first half of 2015, an 11% rise from the same period in 2014. The rise was driven solely by the sales in new stores. Sales in Mega Home stores and in the new store in Malaysia contributed around 8% of total sales in the first half of 2015. Same-store sales dropped by 2.7% y-o-y in the first quarter of 2015 and 0.3% y-o-y in the second quarter of 2015. The drop in same-store sales was attributed to lower farm income in provincial areas and current economic slowdown. Cannibalization in some provinces also drove down same-store sales.
HMPRO's operating income before depreciation and amortization as a percentage of total revenue was 14.8% in 2014 and 14.2% during the first half of 2015, a slight decline from 14.9% in 2013. The decrease in the operating profit margin was mainly due to change in HMPRO's product mix. Sales of Mega Home stores, which generate lower margins than the original HomePro format, made up larger portion of total sales. Lower portion of house brands and start-up expenses for its Malaysia branch also attributed to the weaker margin.
During the past few years, HMPRO invested heavily as it expanded nationwide. The company spent approximately Bt10,000 million in 2013, and Bt7,000 million in 2014 mainly for store expansion, compared with Bt3,000-Bt5,000 million per year previously. As a result, HMPRO's total debt increased from Bt9,787 million at the end of December 2013 to Bt14,527 million as of June 2015. The total debt to capitalization ratio was 49.2% in the first half of 2015, compared with ratios ranging from 34%-40% during 2009 through 2012.
Despite the rise in debt, the company's liquidity position remains satisfactory as a result of efficient inventory management. The cash conversion cycle remained negative at 18 days in the first half of 2015.
Funds from operations (FFO) continued to increase, rising from Bt4,884 million in 2013 to Bt5,623 million in 2014, and to Bt2,941 million for the first six months of 2015. The FFO to total debt ratio remained healthy at 37.2% in 2014 and 37.6% (annualized from the trailing 12 months) for the first six months of 2015. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio stayed above 10 times during 2014 through the first six months of 2015.
HMPRO has a target to open eight new stores nationwide in 2015. To pursue its growth strategy, the company plans to invest approximately Bt6,000-Bt7,000 million in 2015. HMPRO will use its operating cash flow and new borrowings to fund the investments. With its planned capital expenditures, HMPRO's capital structure is expected to remain at an acceptable level. TRIS Rating expects HMPRO's debt to capitalization will stay below 50%. FFO is projected to hover around Bt6,00-Bt7,000 million per year over the next three years.
Home Product Center PLC (HMPRO)
Company Rating: A+
Issue Ratings:
HMPRO169A: Bt4,000 million senior unsecured debentures due 2016 A+
HMPRO179A: Bt2,000 million senior unsecured debentures due 2017 A+
Rating Outlook: Stable