KUALA LUMPUR (Sept 8): 7-Eleven Malaysia Holdings Bhd's growth prospects remain cautious while trading at an expensive price-earnings ratio (PER), said CIMB Equity Research, following the analyst briefing of the company's second quarter earnings results.
CIMB analyst Kristine Wong wrote in the note Sept 7 that the investment bank is maintaining its "Reduce" call for the convenience retailer, with a target price of RM1 pegged to a PER of 24 times.
Wong said 7-Eleven Malaysia is currently trading at an expensive PER of 38/34 times (FY17/18F), versus its earnings per share compound annual growth rate (EPS CAGR) of merely 4% (FY17-19F), and against the backdrop of a regional peer average PER of 24 times.
“While we commend management’s efforts in tightening costs and boosting efficiency, we advocate investors wait and see how well the new strategy is executed,” Wong cautioned in the note.
For its second quarter ended June 30, 2017, 7-Eleven Malaysia's net profit dipped 32.7%, from RM15.07 million to RM10.15 million, attributed to the higher-than-normal inventory write-downs as it removed non-contributing inventories from its convenient stores.
The group reported its first positive same-store-sales growth (SSSG) of +2.4% yoy after eight consecutive quarters of negative growth, which brought its cumulative SSSG to -2% year-on-year (y-o-y), thanks to higher volume growth in its food and beverage and merchandise products, as well as the Hari Raya festivities.
Despite so, 7-Eleven Malaysia registered four consecutive quarters of negative earnings per share (EPS) growth, based on a y-o-y data comparison.
CIMB highlighted that upside risks include faster-than-expected execution of its cost savings programme.
This is in relation to 7-Eleven Malaysia's new “Back to Basics” programme, which 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.
On a positive note, CIMB said the management targets to have its combined distribution centre (CDC) break-even by end-2017, and expects inventory write-downs to normalise and even out in the next few quarters.
The group is also said to be pressing on with in its store expansion programme for 2018, while optimistic about footfall gain in its stores, should the 10-pack cigarette be implemented, as consumers would have to replenish more often.
Meanwhile, it is worth noting that 7-Eleven Malaysia has been trading at a rather steady 52-week range of RM1.12 to RM1.94, possibly owing to support from changes in its shareholdings over the past months.
The company implemented a shares buy-back scheme in April, and welcomed the entrance of Johor Sultan, Sultan Ibrahim ibni Almarhum Sultan Iskandar, as its second largest individual shareholder, with a total shareholding of 103.5 million shares or equivalent to 9.32% in direct interest as of yesterday.
In contrast, its competitor, Bison Consolidated Bhd, the operator of myNEWS.com outlets, has soared approximately 131% in its share price since its listing as of today.
For the past 52 weeks, Bison has been trading between the range of RM1.59 and RM2.76.
“Bison's share price has run ahead of its fundamentals in the short-run, and we are concerned of a share price overhang from the potential placement”, warned Wong in a separate note.
The newly-listed news and convenient retailer joined the Main Board of Bursa Malaysia in March 2016, with an initial public offering (IPO) price of RM1.10, which may have offered the counter a lower base effect.
Latest data in April shows Bison operates 325 outlets, while 7-Eleven Malaysia has 2,122 operating stores nationwide.
As at end of morning trade today, 7-Eleven Malaysia was last traded unchanged at RM1.44 with some 127,500 shares exchanging hands, while Bison was too unchanged at RM2.55, with 6,600 shares traded.