In Thailand, political turmoil after a May 22 coup is making headlines and the unrest appears to be affecting consumer confidence. The country is also dependent on tourism and foreign business, and instability won’t help there, either. In the specialty retail industry, Home Product Center (HMPRO.BK) is Thailand’s version of Home Depot and it’s not hammering out good results.
HomePro, its brand name, is a relatively new chain, founded in 1995. According to StarMine’s models, it has poor earnings quality, which means its earnings may not be coming from sustainable sources. The company scores a low 7 on the StarMine Earnings Quality (EQ) model. Let’s take a look at some of the reasons.
Anxious consumers
As you can see in the chart above, the consumer confidence indicator has plummeted from 85 a year ago to 68, and the drop means that this is probably the worst time to be expanding business. That is exactly what HomePro is doing, with new stores both in Thailand and in Malaysia. The addition of new stores is fine as long as they are being financed from operations, but that does not seem to be the case.
As you can see in the chart below, HomePro has had negative free cash flows in seven of the last eight quarters. That stems from the fact that in that time period, the company has spent more on capital expenditures that it earned from operations. In the last quarter, the company earned 726 million Thai Baht (THB) in net income, but still saw a negative free cash flow of THB -359 million. In the process, total debt has crept up to almost THB 10 billion, increasing four fold over the last five years.
Source: Eikon/StarMine
Return on assets is contracting
Another reason the company may want to give more thought to their expansion efforts is the falling return on net operating profits. This measure is a sign of management efficiency in generating returns on assets, and tends to be a sustainable measure. However, over the last two years, return on net operating assets has fallen to 21% from a much healthier 36%. Increasing capital investments in an environment of falling returns, combined with poor cash flow, is a sign of poor earnings quality.
Source: Eikon/StarMine
Sawing into value
HomePro does seem to have some favorable buzz going for it. Home improvement is a new concept in Thailand and a one stop shop is a novel idea. That euphoria may have spilled into the stock price and it does not appear cheap. The current F12M P/E is 28, a pretty lofty valuation for a company that is seeing operating margins flatten and operating efficiency falling for the last couple of years. The current F12M P/E is much higher than the historical median of 14, a sign that expectations for earnings for the next year are much more optimistic than the past few years. In this troubled environment, it remains to be seen if HomePro is up to the challenge.
Source: Eikon/StarMine
Sand off rough edges
International businesses continue to hesitate when considering entering the Thai market. Thai consumers continue to be cautious as the latest reports expect the military coup to extend for a period of one year as reported in this Reuters News article. That could mean an extended slump in the Thai economy.
Consumers will probably concentrate on basic necessities rather than worry about home improvements, which could hit HomePro earnings. Another factor to consider is that although the concept of Home Depot and Lowe’s is hugely popular in the United States, do it yourself home improvement is alien to the Asian culture as hired help is much cheaper and widespread.
That could mean HomePro may not have as wide an appeal as an American Home Depot. The poor earnings quality indicator could be an early sign that the company needs to build a stronger floor under its financial results.
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