Earnings forecast revised up and target price upgraded to reflect growth prospects

After the analyst meeting on Monday and recently-announced impressive 2002 performance, we've revised up our 2003 and 2004 earnings forecast of Home Product Center (HMPRO) by 57% and 49%, respectively. The company is projected to post 2003 net profit of Bt135mn, up 24% yoy, on the back of opening six new stores, same-store sales growth and growth in demand based on the pick-up in the property sector.

Even with the branch expansion, HMPRO's financial position is still quite manageable with a projected net debt-to-equity ratio of 0.77x at year-end 2003. We've upgraded our fair value estimate, based on DCF, to Bt2.74, which offer 34% upside from the current price. We rate the stock as a BUY.

HMPRO earnings summary

Source : Kim Eng Research

• HMPRO plans to open six outlets in 2003 at Ramkamhaeng, Rama II, Prachachuen, Carrefour-Ladprao, Carrefour-Pattaya and another outlet in Bangkok. Given the expansion of its outlets, HMPRO will gain from economies of scale and enhanced bargaining power with suppliers, which should translate into widening margins.

Number of HMPRO stores

Source : HMPRO

• Following a recovery in property sector, the company recorded an impressive 17% growth in same-store sales last year. It also targets to achieve 10% same-store sales growth this year. Sales of decoration products and electrical instruments, lighting & appliances continue to be the major source of income, accounting for 30-32% of total sales each.

• HMPRO has renovated Fashion Island outlet, which had been contributing less than 10% of sales, by expanding its floor area from 5,000 sqm to 10,000 sqm. HMPRO added a furniture centre and a The Power, which sells digital home entertainment products. The company's strategy this year is to focus on consumer finance and additional services for consumers who want to repair or re-decorate their homes.

• HMPRO is the major player in the market, having about 10% of the industry worth Bt50,000mn last year. The industry is estimated to grow 10% this year as a result of low interest rates and government measures to boost the property sector.

• We expect HMPRO's sales to increase 51% to Bt6,877mn due to its aggressive branch expansion as well as industry growth based on growing demand for new housing and room for growth in the home improvement market growth.

• Rental income, which accounted for 0.5% of total sales, is projected to grow after HMPRO adds 5,800 sqm of rental space this year with a monthly rental rate of Bt400/sqm/month. The rate will be raised by 10-15% every three years.

• This year's capex of Bt1,400mn will be financed through internal cash flow and borrowings. The company's net debt-to-equity ratio is forecast to rise from 0.13x to 0.77x. As HMPRO's source of funds comes partly from borrowings, the company will benefit from the current low rate of interest. The management believes that a private placement of 50mn share would be the last alternative for financing.