• Trading at 22.5x FY18F PE, 25% discount to peers and -1SD to its historical mean; strong fundamentals suggest limited downside
• Expect 4Q17F earnings to come in at Bt190m (+45% qoq, +112% yoy); additional costs for new franchise business are to support long-term operations
• Maintain OUTPERFORM, TP Bt93; COL is a good bottom-fishing for long-term investors

Recent correction due to different views on valuation

The share price has corrected by 10% in one month, possibly due to different views on what is fair valuation as our FY18F profit is in line with consensus estimates. Our sensitivity analysis indicates the TP would be at Bt72 based on 26x FY18F PE or 20% discount to peers’ average in worst case scenario. Hence, current valuation at 22.5x FY18F PE is too low. Investors may be concerned on cost related to its new warehouse and B2S renovation in FY18 but we have factored into our earnings model. COL will start the new franchise business in 2H18. Downside risk to our forecast would be higher cost related to this business than our forecast, which we assume at Bt40m in FY18.

Business outlook remains positive; success of franchise model would be game-changer

We maintain FY18F profit at Bt882m, up 57% yoy. This would be driven by (i) 5% growth in revenue from OfficeMate and B2S, (ii) 20bps improvement in gross margin from increasing share of contribution from own brands, and (iii) absence of losses from online business. A successful OfficeMate franchise model would be a long-term growth driver for COL. Currently, COL has 25% market share in Thailand where most of its customers is in Bangkok. Based on FY16 OfficeMate revenue (Bt6.5bn), this implies a market size of Bt25bn. If its franchise model is successful, there is potential to double OfficeMate revenue (60% of sales) within five years.

OUTPERFORM, DCF-based TP of Bt93 implies 33.8x FY18F PE

COL deserves valuation premium given positive fundamental changes to its business. FY18 would be the first year of zero-loss from the online business. Meanwhile, additional costs related to its new franchise business and B2S renovation are to support long-term operations. Based on its record, sales per sqm and EBIT margin per B2S store would improve by 50% and 10%, respectively, after renovation.