Bangkok--12 Mar--TRIS Rating
TRIS Rating has affirmed the company and senior unsecured debenture ratings of Siam Global House PLC (GLOBAL) at “A-” with “stable” outlook. The ratings reflect the company’s proven record in the home improvement retailing industry in Thailand, successful strategy to expand its warehouse-format stores into provincial areas, and its track record in cost control. These strengths are partially offset by the company’s long cash conversion cycle and intense competition among modern home improvement retailers. The uncertainty in economic recovery and low farm income, which adversely affect the purchasing power of provincial consumers, are rating concerns.
The “stable” outlook reflects the expectation that GLOBAL will maintain its market position in the home improvement retailing industry. The company is expected to sustain its cost control competency as well as gradually improve inventory and logistics management while it expands.
The rating upgrade is limited over the next 12-18 months because the purchasing power of provincial customers is recovering slowly. In addition, the prices of agricultural products have remained low, and households are already carrying high levels of household debt. A rating downgrade could occur if the recovery of purchasing power is longer than expected or the competition is more intensified, leading to slow sales and noticeably weakening profitability.
GLOBAL is one of the leading warehouse-style home improvement retailers in Thailand. It was established in 1997 by Mr. Witoon Suriyawanakul. The company was listed on the Stock Exchange of Thailand (SET) in August 2009. In November 2012, SCG Distribution Co., Ltd. (SCGD), 100% owned by Siam Cement Group PLC (SCG), became a strategic partner of GLOBAL. As of March 2015, GLOBAL’s major shareholders were the Suriyawanakul family (37.08%) and SCGD (30.02%).
The company’s first branch is located in Roi-Et province, which is the founder’s hometown. As of February 2015, the company operated 32 stores across Thailand with total store area of 799,026 square meters (sq.m.). GLOBAL offers a wide range of construction materials, hardware tools, and home decoration items, amounting to approximately 100,000 stock keeping units (SKUs). The company’s stores are designed in a large-scale warehouse format. Each store has an average selling area of 22,000 sq.m.
In 2014, the economic slowdown in Thailand resulted in weak private consumption nationwide. Thailand’s private consumption fell by 3.0% year-on-year (y-o-y) during the first quarter of 2014 but gradually rose by 0.2%-2.2% y-o-y after unleashed political instability in Thailand during the second quarter through the fourth quarter of 2014. GLOBAL’s same-store sales growth (SSSG) dropped by 7.1%-11.3% during the first quarter of 2014 through the third quarter of 2014, but modestly improved to a growth of 1.3% in the fourth quarter of 2014. In addition to the weak economic condition, the contraction in GLOBAL’s same-store sales growth came from the low farm income. Intense competition and cannibalization in some areas were also attributable to negative same-store sales growth. The decline in construction material prices, especially steel price in 2014, which accounted for about 15% of GLOBAL’s main product, also weighted down the SSSG of the company.
Despite a negative same-store sales growth, GLOBAL’s total sales still posted a growth of 9.0% y-o-y in 2014, thanks to additional sales from new stores opened in 2013-2014. GLOBAL’s operating margin before depreciation and amortization remained satisfactory at 10.9% in 2014, down slightly from 11.3% in 2013. The decrease in operating margin was partly due to a decline in the gross margin of the construction materials segment. GLOBAL’s inventory level remained high in 2014. The high inventory level held cash conversion cycle staying long at 154 days in 2014.
GLOBAL’s financial profile remained satisfactory in 2014. Earnings before interest, tax, depreciation and amortization (EBITDA) modestly rose from Bt1,619 million in 2013 to Bt1,691 million in 2014. The EBITDA interest coverage ratio remained healthy at 12.72 times in 2014, despite a decline from an abnormally high level of 22.8 times in 2013. The ratio of funds from operations (FFO) to total debt remained strong at 32.53% in 2014.
GLOBAL has unveiled plans to open seven stores per year during the next three years. GLOBAL is building a new distribution centre (DC) in Ayudhya province. However, the opening of the DC has been delayed because the company decided to implement an Automated Storage Retrieval System (ASRS). Thenew ASRS will reduce the labour force in the warehouse, track inventory effectively, and trim inventory levels. The DC is expected to be completed by the end of 2015. GLOBAL’s investment budget will be about Bt2,500 million per year during 2015-2017. The total investment will drive leverage higher gradually, but the debt to capitalization ratio is projected to stay below 50% over the next few years.
Siam Global House PLC (GLOBAL)
Company Rating: A-
Issue Rating:
GLOBAL172A: Bt3,000 million senior unsecured debentures due 2017 A-
Rating Outlook: Stable