1QFY16profit down 9% y‐y and 11% q‐q in face of weak purchasing power

　　M posted a downbeat set of quarterly results in 1QFY16as profit dropped further by 9% y‐y and 11%q‐q to Bt438mn. In this period, the pace of contraction in SSSG at MK Suki restaurants narrowed to ‐5% from ‐8% in the prior quarter but widened from 0% in the same year‐ago period. SSSG at Yayoirestaurants came in at ‐1%, which was better than ‐8% in the previous quarter but worse than +2% inthe year‐earlier period. M added 7new restaurant outlets to its portfolio in this period, comprising 2MK Suki restaurants, 4Yayoi restaurants and 1Miyazaki Teppanyaki restaurant. For the quarter, salesclocked in at Bt3,590mn, flat y‐y but down 2% q‐q while steady raw material prices and selling priceincreases in 4QFY15drove margins higher to 67.3% from 66% in the year‐earlier period. SG&Aexpenses ticked up 4% y‐y and 2% q‐q on higher sales promotional expenses as part of the efforts toboost sales. For overseas operations, losses narrowed from the year‐earlier period but deepenedfrom the previous quarter as overseas economies remained in the doldrums.

　　Tough road ahead for the rest of the year

　　Songkran dining and travel tax breaks as part of the government’s short‐term stimulus measures sentsales at both MK Suki and Yayoi restaurants in the first half of Apr 2016up 10% and 20% respectivelybut we believe the positive impact from tax cheer would only be short‐lived in the face of persistentlyweak purchasing power. However, M has attempted to ratchet up sales through a number ofstrategies including the likes of (i) the launch of Suki lunch set to attract office workers that have ashort lunch break and (ii) the launch of its latest promotional campaign between Apr‐Jun 2016. Whatwill remain to be seen is whether new campaigns could help revitalize sales as it has previouslythought. Despite everything, the slower‐than‐expected pace of earnings recovery in 1QFY16gives usan excuse to cut our FY16net profit outlook for M to Bt1,835mn, down 1% y‐y. In our new forecast,we estimate full‐year sales will rise 3% y‐y to Bt14,966mn based on assumptions that SSSG at MK Sukirestaurants will remain in negative territory at ‐4%, Yayoi restaurants will achieve positive SSSG of 2%and 40net new restaurants outlets will be added to the portfolio in FY16. For the year, margins tendto be similar to the levels achieved a year earlier while SG&A expenses look set to rise on morepromotional campaigns.

　　‘NEUTRAL’ rating with downwardly revised FY16target price of Bt50.50/share

　　We keep a ‘NEUTRAL’ stance on M shares but we tweak down our FY16target price to Bt50.50/shareto reflect the above earnings cut. The rating reflects our view that persistently sluggish economicgrowth may dampen the pace of its earnings recovery from what we have previously thought anddashing hopes of growth from potential M&As, which have made no progress so far would continueto keep its earnings stuck in slow lane though M has launched promotional campaigns in a bid to revup sales.