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 in 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 sustain its strong operating performance and acceptable leverage level while pursuing its growth strategy. The company’s new store format is expected to capture a wider group of customers and enhance its operating performance in the medium term.
HMPRO is Thailand’s leading home improvement retailer. As of September 2014, its major shareholders were Land & Houses PLC (LH; owning 30.23%) and Quality Houses PLC (QH; 19.77%). Currently, HMPRO owns two types of stores, Homepro store and Mega Home store. Homepro store, an 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.), while Mega Home store is a large-scale warehouse-style store, designed to serve the needs of contractors, construction project owners, resellers, and end-users in a store area of 12,000-20,000 sq.m. During the past few years, HMPRO’s aggressive growth strategy drove it to open eight new stores in 2012 and 13 new stores in 2013, compared with an average of four new stores per year in earlier period. A shift in consumer preferences towards modern retail outlets has fuelled its expansion.
At the end of September 2014, HMPRO owned and operated 71 stores in total, with 21 stores located in Greater Bangkok, 46 stores upcountry in the HomePro format, and four Mega Home stores. During the first nine months of 2014, the company opened six new stores upcountry, four 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 expansion plans over the next few years will focus to expand its coverage in provincial areas.
HMPRO’s total sales stood at Bt40,112 million in 2013, growing 16% year-on-year (y-o-y) from 2012. Sales continued to increase in the first half of 2014, climbing to Bt23,102 million, a 21% rise over the same period in 2013. The rise was mainly driven by the sales in new stores, while same-store sales grew at a slower pace. In the first quarter of 2014, HMPRO’s same-store sales grew by only 3.8% y-o-y, compared with the rate of 6.3%-6.8% the company achieved during 2011-2012. The country’s political instability, economic slowdown, lower farm income, and high level of household debt lowered consumer spending. Same-store sales rebounded in the second quarter of 2014, rising by 6.5% over the same period of the prior year.
HMPRO’s gross profit margin increased from 26% in 2012 to 26.8% in 2013, but fell slightly to 26.2% in the first half of 2014. The decrease in the gross margin was mainly due to a change in the revenue mix and a rising contribution from Mega Home stores, which generate lower margins than those of HomePro stores. Funds from operations (FFO) continued to increase, rising from Bt3,993 million in 2012 to Bt4,884 million in 2013, and to Bt2,656 million for the first six months of 2014. Liquidity remained satisfactory, due to efficient cash management. During the past few years, HMPRO invested aggressively for store expansion nationwide. The company spent approximately Bt6,000 million in 2012 and Bt10,000 million in 2013, compared with approximately Bt3,000 million per year in the earlier period. As a result, total debt increased from Bt5,523 million in December 2012 to Bt11,030 million as of June 2014. The total debt to capitalization ratio was 46.7% at the end of first half of 2014, compared with ratios ranging from 34%-40% during 2009 through 2012. Despite the rise in total debt, the FFO to total debt ratio remained healthy at 44% in 2013 and 54.1% (annualized with trailing 12 months) for the first six months of 2014.
HMPRO has a target to open 10 new stores in Thailand and first store in Malaysia in 2014. To achieve its target, the company plans to spend approximately Bt8,000 million in 2014 by using a mix of operating cash flow and new borrowings. HMPRO’s aggressive expansion may push its debt burden higher. However, HMPRO’s capital structure is expected to remain at acceptable level. At the same time, its operating cash flow is expected to increase due to the gradual recovery of the economy, store expansion, and efficient supply chain management. These factors will keep HMPRO’s cash flow protection at a healthy level. HMPRO has additional financial flexibility in raising funds via leasing some of its retail space in Hua Hin Market Village and HomePro Village Suvarnabhumi to the real estate investment trusts (REITs).
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