TRIS Rating has affirmede the company rating and the rating of the senior unsecured debentures 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 intense 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 level of leverage at an acceptable level while pursuing its growth strategy. HMPRO’s ratings and/or outlook could be revised upward if its expansion efforts, in the new store formats or in new markets, are successful and enlarges cash flow generation materially. In contrast, the ratings and/or outlook could be downgraded if more intense competition or aggressive expansion leads to persistent declines in financial profile.
HMPRO is Thailand’s leading home improvement retailer. As of September 2016, 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 3,000-12,000 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 10,000-20,000 sq.m.
At the end of September 2016, HMPRO owned and operated 88 stores in total, comprising 22 stores in Greater Bangkok, 56 stores upcountry, one store in Malaysia, plus nine Mega Home stores. During the first nine months of 2016, the company opened five new stores, comprising three HomePro and two Mega Home stores. HMPRO established a strong footprint in the modern home improvement retailing industry nationwide through its ongoing expansion.
The economic slowdown and prolonged low farm price negatively affected most retailers’ same store sales growth during 2015 through the first nine months of 2016. HMPRO’s same-store sales fell by 1.4% year-on-year (y-o-y) in 2015. Cannibalization in some areas also played down HMPRO’s same store sales growth. However, same-store sales improved modestly, growing by 2.0% y-o-y in the first nine months of 2016. The improvement was attributed to continued spending growth of the mid-to-high-income clients in Greater Bangkok. Including opening more stores, HMPRO’s sales rose by 9.5% y-o-y to Bt52,513 million in 2015 and increased by 9.5% y-o-y in the first nine months of 2016. Sales in Mega Home stores and at the store in Malaysia contributed around 11.3% of total sales in the first nine months of 2016.
HMPRO’s operating income before depreciation and amortization, as a percentage of total revenue, was well managed and stayed healthy at 15.0% in 2015 and 14.9% during the first nine months of 2016. The slight decline in the operating profit margin in the first nine months of 2016 was mainly due to changes 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.
During 2012-2015, HMPRO invested heavily as it expanded nationwide. The company spent approximately Bt5,000-Bt10,000 million annually or 8-13 new store expansion per year during 2012-2015, compared with Bt2,000-Bt4,000 million or four new stores per year previously. As a result, the total debt to capitalization ratio rose to 46.7%-50.8% during 2013 through the first nine months of 2016, 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 successful store expansion. Funds from operations (FFO) continued to increase, rising from Bt5,623 million in 2014 to Bt6,394 million in 2015, and to Bt5,123 million for the first nine months of 2016. The FFO to total debt ratio was 37.2% in 2014, 40% in 2015, and 42.1% (annualized, from the trailing 12 months) for the first nine months of 2016. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio stayed healthy at 11.3-11.7 times during 2014 through the first nine months of 2016.
To pursue its growth strategy, the company plans to open 12 new stores including new store format HMPRO Living in 2016. Total capital expenditures are set approximately Bt7,000-Bt8,000 million. Given the planned capital expenditures and projected FFO of Bt6,000-Bt8,000 million per year over the next few years, TRIS Rating forecasts HMPRO’s debt to capitalization ratio (leased-adjusted) will stay remain at moderate level or approximately 50%. FFO to total debt is projected to hover around 35%-40%.
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