Description

Summary: SSI Group, a US$225 million (US$70 million free float) specialty retailer, operates stores for western brands in the Philippines. Following a period of rapid expansion which culminated in the 2015 emerging markets downturn, SSI underwent a multi-year brand and store rationalization program. The underlying growth and return profile of the company has only recently become apparent post the restructuring's completion. While SSI’s share price has re-acted it has not been in accordance with the change in the businesses’ fundamentals. Currently priced at P$3.8 per share, SSI is unlevered and trades at 4.9x LTM PE. We project organic growth of 10-15% annually with a 20-25% dividend payout ratio. Our fair value estimate, based on 12x FY25E PE, is P$10 per share, reflecting 160% upside.

Background: SSI was founded by the Tantoco family which in the 1950s began importing and re-selling western products in the Philippines. The family subsequently opened several high-end department stores and later in the 1980s formed SSI to operate standalone stores for the brands it was selling in those stores. The family listed SSI in 2014 to provide a liquidity event as the business was being passed down between generations and as a catalyst to professionalize the company. The family continues to directly own its department stores along with several other retail assets including the Philippines Starbucks franchise.

Today, SSI operates 526 stores across 95 brands with a significant presence in the luxury and aspirational segments. It also operates in the fast fashion, home and food and beverage segments. Notable brands are Hermes, Prada, Kate Spade, Gap, Pottery Barn and Shake Shack. The family retains a 70% ownership and SSI’s CEO is Anthony Huang, a third-generation member of the Tantoco family. Day-to-day operations are handled by the professional management team beneath him.

The period prior to 2015 was marked by widespread enthusiasm in the potential growth of emerging markets and particularly the emerging markets middle-class consumer. In anticipation of this growth SSI had expanded its store network into secondary and tertiary cities in the Philippines and added several brands catering to this segment. This growth never materialized and heading into the 2015 emerging markets downturn SSI was left with a set of unproductive assets which depressed the company’s overall returns and led to elevated inventory and debt levels.

In response, in 2016 SSI launched a brand and store rationalization program which over seven years saw it close 37% of its network. Post restructuring SSI has seen its EBIT margins expand from ~7% to ~12.5% and days of working capital has shrunk from 132 days to a normalized level of 80 days. Net debt (exc. leases) has reduced from P$6.7B to net cash of P$3.5B. The table below highlights the structural change in SSI’s economics.

Post the restructuring, in 2023 SSI returned to growing its brand count and expects its selling space to expand by ~7% per year. The company targets a 17% IRR on new stores, assuming the store is closed after five years with no residual value, which we view as conservative. SSI expects to spend between 50-75% of net income to fund this growth. Between 2015 and 2023E sales per square meter grew on average by 7.2% per year on a US dollar basis. We expect slightly slower growth going forward and forecast 10-14% aggregate topline growth per year.  Looking at profitability, it is important to note that SSI’s margins in 2022 were elevated as Filipino luxury shoppers shopped domestically as international travel was limited. 2023 margins are at a more normalized level. The company expects to stay in a net cash position and return excess free cashflow to shareholders via dividends. In 2023 the company had a small buyback program but it was limited by the share’s liquidity.

In 2023 we estimate SSI will earn a 21.2% ROIC. While SSI’s ROIC is significantly elevated versus its historic levels, the company would argue this was always the underlying earnings power of the core business. The closest comp is Map Aktif, a pure-play in Indonesia with a similar business model which earns a 29% ROIC.

Despite its above cost of capital earnings, SSI’s business faces competition. There are two primary threats, 1) other companies offering similar services and 2) brands choosing to go direct and cut SSI out. As a local player and the largest in the Philippines SSI has several competitive advantages though including 1) economies of scale in distribution and rent negotiation, 2) local market knowledge and expertise which is valuable for a high-end brand where the Philippines may only support a handful of stores, and 3) its existing relationships and reputation with brands which stretch back up to thirty years.   

There are several local competitors which offer similar services including the SM Group and Robinsons which operate malls. Both tried to enter SSI’s luxury market in 2016 but were unable to win any of SSI’s brands or new brands and have subsequently exited. MAP Aktif recently enter the Philippines focused on the athleisure segment and remains a threat. Despite these threats and as a testament to SSI’s strong value proposition, since its inception SSI has never been terminated by a brand.  

Several of SSI’s brands have decided to directly operate their brands in the Philippines though. In these cases, they have retained SSI as a 40% JV partner. To date this has been an opportunity, as these brands have offered better pricing and fuller assortments on merchandise to their controlled subsidiaries, such that SSI’s absolute profits have increased despite their lower percentage ownership, but long-term it remains a threat. Other risks which bear monitoring are 1) geopolitical risks associated with the Philippines, 2) how brands continue to handle their e-commerce program and 3) the adoption of luxury or other taxes in the Philippines.

While the period between 2016 and 2019 was marked by an underperformance in emerging markets growth versus expectations, longer-term the convergence in consumer spending in emerging markets and developed markets will continue. With its strong brands SSI is an effective toll-road on the growth of consumer spending in the Philippines which is a multi-decade story. To illustrate the long-term opportunity, today 80% of SSI stores are in the Metro Manilla area and SSI only views 2 million out of the Philippine’s 115 million population as its target market.

Valuation: At P$3.8 per share, SSI trades at ~5x PE. We assume SSI can grow its topline 10-14% per year while paying out 20-25% of net income as a dividend, which equates to a 4-5% dividend yield. The best comps for SSI in the Philippines are The Keepers Holdings, Shakey’s Pizza and Wilcon Depot, which offer similar return and growth profiles and trade at 7.3x, 13.5x and 19x FY25E PE. Our fair value is 12x FY25 PE or ~P$10 per share. 

Catalyst

Time and continued positive results.