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 prolonged low farm income and economic slowdown, 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 its profitability while it expands.
GLOBAL’s ratings and/or outlook could be revised upward if its cash flow generation improves significantly while cash flow protection, as measured by the FFO to total debt, is maintained at approximately 30%-35% on a sustainable basis. In contrast, a rating downgrade could occur if GLOBAL’s operating performance declines dramatically for an extended period.
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 2016, GLOBAL’s major shareholders were the Suriyawanakul family (37.04%) and SCGD (30.02%).
The company’s first branch is located in Roi-Et province, which is the founder’s hometown. As of December 2015, the company operated 38 stores across Thailand with a total store area of 921,779 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 2015, the sluggish economy in Thailand resulted in weak private consumption nationwide. Thailand’s private consumption grew by 2.5% year-on-year (y-o-y) during the first quarter of 2015, and grew merely by 1.7% and1.8% y-o-y during the second quarter and the third quarter of 2015. However, the private consumption in Thailand improved in the fourth quarter of 2015, rising by 2.5% y-o-y, after Thai government announced tax deduction measure to stimulate domestic consumption during the last week of 2015. GLOBAL’s same-store sales growth (SSSG) grew by 0.4% and 4.0% during the first quarter and the second quarter of 2015. However, SSSG fell by 3.5% and 4.5% during the third quarter and the fourth quarter of 2015, which resulted in SSSG fell by 0.5% for the whole year of 2015. In addition to the weak economic condition, the contraction in GLOBAL’s same-store sales growth came from the low farm income, which cut purchasing power of most consumers, especially in provincial areas. The decline in construction material prices also weighted down the SSSG of the company.
Despite a negative same-store sales growth, GLOBAL’s total sales still posted a growth of 8.4% y-o-y in 2015, thanks to additional sales from new stores opened in 2014-2015. GLOBAL’s operating margin before depreciation and amortization remained satisfactory at 11.4% in 2015, up from 10.7% in 2014. The rise in operating margin was mainly due to change in GLOBAL’s product mix. Sales of house brands, which generate higher margins than the other private brands, made up a larger portion of total sales. The depreciation of Chinese yuan against Thai baht was also attributed to the improved margin as it partly lowered the cost of imported house brands. In September 2015, GLOBAL gradually expands its business into neighbouring countries. GLOBAL House International Co., Ltd. (GBI), a joint venture between GLOBAL and SCGD, invested 34% stake in Souvanny Home Center Public Company Limited (Souvanny). Souvanny was one of the leading home improvement retailers in the Lao PDR and listed on the Lao Securities Exchange (LSX). GBI spent Bt740 million for this transaction. The new investment in Laos contributed equity income of Bt2.9 million in the fourth quarter of 2015 to GLOBAL. GLOBAL’s earnings before interest, tax, depreciation and amortization (EBITDA) rose by 15.4% from Bt1,670 million in 2014 to Bt1,927 million in 2015. The EBITDA interest coverage ratio remained healthy at 13.34 times in 2015. The ratio of funds from operations (FFO) to total debt remained satisfactory at 34.09% in 2015, compared with 31.6%-37.9% in 2013-2014.
GLOBAL plans investment budget of about Bt1,400-1,900 million per year during 2016-2018. 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. This DC is expected to be completed by the end of 2016. The new automated DC is expected to reduce the labour force needed in the warehouse, improve efficiency, and shorten cash conversion cycle, which stayed at 142 days in 2015.
Even though GLOBAL’s same store sales remains negatively affected by the low purchasing power of consumers in provincial areas on the backdrop of low farm income and economic slowdown, successful penetration in new areas by adding new stores will continue to support total sales growth. In the base case scenario, GLOBAL is projected to generate FFO at about Bt1,600-Bt1,800 million per annum. The store expansion and new DC will drive leverage higher gradually, but the debt to capitalization ratio is projected to remain below 50% over the next few years.
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