Analysts Recommend “BUY” on BJC in Light of Improving Covid-19 Situation in 3Q21

Analysts unanimously gave a “BUY” rating to Berli Jucker Public Company Limited (BJC) due to the company’s low valuation and the hope that Covid-19 situation will ease in 3Q21. This could lead to improvement in BIGC’s performance.

While the Covid-19 epidemic persists in 2Q21 and packaging businesses may face increased raw material costs, gross margins have increased as the quality of fresh food goods has improved. Along with an emphasis on high-margin products.

Also, analysts expect that BJC’s sales are increasing across all business units. The packaging industry, in particular, has benefited from the movement toward sustainable packaging and the shift from using steel cans to aluminum. Additionally, functional beverages are growing in popularity.

 

Kasikorn Securities (KS) stated that BJC’s valuation indicates short-term domestic consumption concerns. Simultaneously, KS anticipated that the economy would gradually recover, which would benefit Big C in the later phases.

The COVID-19 outbreak continued to have an effect on overall operating outcomes in 2Q21. In April 2021, same-store sales (SSSG) are predicted to go into negative territory, ranging from -1 to -3%, compared to the same time last year.  This trend is likely to continue in May, as lockdowns began to ease in early May 2021.

Additionally, as a result of government-mandated shop and restaurant closures to prevent the spread of COVID-19, Big C was forced to offer rental discounts to some tenants in order to preserve the rental rate. Meanwhile, other industries saw little impact in comparison to BIGC, except for an increase in pulp and palm oil. This is the primary raw ingredient for soap, food, and paper manufacturing, which will likely exert downward pressure on gross margins beginning in 2Q21.

What will assist mitigate the impact, though, is improving BIGC’s fresh food quality and managing SG&A expenditures in the prior quarter.

 

Maybank Kim Eng (Maybank) expected BJC’s 2Q21 earnings to recover both QoQ and YoY. Maintain BUY with a DCF-based TP of THB44 (7.1% WACC, 3% G). Even though the consumer products (FMCG) and the hypermarket (BigC) segments are affected by the COVID-19 outbreak, the packaging segment has received orders from new customers and is seeing positive demand momentum. In addition, sales of healthcare products should also continue growing.

The packaging business should grow QoQ/YoY in 2Q21. Glass bottle sales have recovered as non-alcoholic beverages and food customers see improving exports from the easing of Covid-19 cases overseas. In addition, the segment’s gross margin should rise on cost control and production efficiency gains. Sales of aluminum cans will improve QoQ as manufacturers exporting to Myanmar resume shipments after their 1Q21 operations faced supply chain and financing interruption (letters of credit). Sales of healthcare products should remain favorable, thanks to more sales of X-ray machines and flu vaccines.

Consumer products in 2Q21 will remain under pressure from weak consumption amid higher raw material costs. However, good cost control will help reduce the impact. BigC’s QTD sales fell more than 10% YoY due to the 3rd wave infection. However, gross margin should recover thanks to the improvement in fresh food product mix (lower wastage) and more focus on high-margin products. Rental income in the trade centres is expected to decline QoQ due to a 10% rental discount to help tenants. BJC’s Plan to acquire the MM Mega Market chain in Vietnam is still on track but no specific timeframe.

The management maintains its 2021 sales growth target of low-mid single digit as all business segments see a better outlook. The packaging business is benefiting from sustained growth in demand and a switch from steel to aluminium cans by some customers . In addition, new can sizes are being produced for the fast growing functional drinks market. Gross margin is targeted to increase 50 bps to x% mainly driven by cost efficiency gains in packaging and FMCG segments. SG&A is under control and still benefiting from the business restructuring last year.

 

Securities	Recommendation	Target Price
Maybank Kim Bank (Maybank)	BUY	44.00 baht
Country Group Securities (CGS)	BUY	43.00 baht
Kingsford Securities	Accumulation	42.00 baht
Kasikorn Securities (KS)	BUY	39.00 baht
Land and House Securities (LH)	Speculative-Buy	37.00 baht