This article first appeared in The Edge Financial Daily on September 11, 2017
7-Eleven Malaysia Holdings Bhd
(Sept 8, RM1.45)
Reiterate reduce with an unchanged target price (TP) of RM1.00: We attended 7-Eleven Malaysia Holdings Bhd’s analyst briefing for its second quarter of financial year 2017 (2QFY17) along with 10 sell-side analysts. It was chaired by the group’s newly appointed chief executive officer (CEO) Ho Meng and deputy CEO Hishamuddin Hassan. The briefing bore no major surprises and mainly discussed the company’s 2QFY17 results as well as the progress of its “Back to Basics” programme.
To recap, 7-Eleven’s 2QFY17 sales increased 9.8% year-on-year (y-o-y) but core net profit fell 33% y-o-y to RM10.2 million. During the briefing, management shared that the profit decline was further aggravated by the higher-than-normal inventory write-down (a usual industry practice known as shrinkage) as it removed non-contributing inventories from its stores. The group expects this to normalise and even out in the next few quarters.
More notably, the group reported its first positive same-store-sales growth (SSSG) of 2.4% y-o-y after eight consecutive quarters of negative growth, which brought its cumulative SSSG to -2% y-o-y. This was attributed to higher volume growth for its food and beverages and general merchandise products as well as the boost from Hari Raya festivities. Cigarette sales contribution in the first six months of FY17 declined two percentage points to 37% (versus 39%). In addition, average ticket spend per customer for 2QFY17 was healthy and saw an uptick of 2.6% y-o-y.
Management remains optimistic about its new “Back to Basics” programme and targets to have its combined distribution centre (CDC) break even by end-FY17. It plans to bring down its overall end-to-end supply chain operating costs, particularly for its warehousing, staff and transportation overheads to achieve cost efficiencies while aiming to increase its CDC charges and allowances to its suppliers. It aims to be the lowest cost operator in the industry.
Other key briefing highlights included: i) management will tighten its promotional campaigns and continuously work with suppliers to maintain its margins as it makes a conscious effort to protect profitability; ii) the group will maintain its store expansion programme at 150 stores per annum in FY18; and iii) management shared that if the 10-cigarette pack is successfully implemented, it will attract more footfall to its stores as consumers would replenish more often.
Our earnings estimates are intact. While we commend management’s efforts in tightening costs and boosting efficiency, we advocate investors to wait and see how well the new strategy is executed. We retain our “reduce” call with a TP of RM1.00, pegged at 24 times FY18 price-earnings ratio (PER), in line with regional peer average. 7-Eleven is currently trading at FY17/FY18 PERs of 38 times/34 times versus its modest FY17-FY19 earnings per share compound annual growth rate of 4%. Upside risks include faster-than-expected execution of its cost-savings programme. — CIMB Research, Sept 7