This article first appeared in The Edge Financial Daily on May 28, 2018
7-Eleven Malaysia Holdings Bhd
(May 25, RM1.51)
Maintain reduce with a lower target price (TP) of RM1.12: 7-Eleven Malaysia Holdings Bhd’s first quarter of 2018 (1QFY18) sales ticked up 2.5% year-on-year (y-o-y) to RM535.7 million while core earnings rose 11.6% y-o-y to RM8.9 million. The results are below our and Bloomberg’s consensus expectations, with 1Q core earnings making up only 16% of both full-year forecasts, mainly due to higher-than-expected operating costs.
The group’s y-o-y sales growth was mainly supported by better product mix, higher number of stores added (+10 net new stores in 1QFY18) and active consumer promotional activities which helped to boost sales. In addition, operational issues back in 1QFY17 also impacted sales during that quarter. 1QFY18 gross profit margin expanded 1.3% points y-o-y 31.9% on the back of improved product mix. As such, 1QFY18 core net profit grew 11.6% y-o-y, in line with higher revenue and higher operating income
The removal of the goods and services tax (GST) could potentially benefit the convenience store sector. We expect the price of almost all goods to effectively decrease by around 6%, directly translating into thicker pockets for consumers. In addition, initiatives by the newly formed government to reduce the cost of living could further boost the consumers’ disposable income, in turn spurring consumer spend, leading to stronger topline growth for consumer companies.
With 1QFY18 results below expectations, we cut our financial year 2018 forecast (FY18) to FY20F earnings per share (EPS) by 3.9% to 4.1% to account for higher operating costs due to increased rental and utility costs. We also factor in potential earnings from the abolishment of the GST. Looking ahead, we understand that the group remains committed to opening 200 new stores a year and will be refurbishing up to 150 stores this year.
We maintain our “reduce” call, with a lower end-2018F TP of RM1.12, still based on calendar year 2019 forecast target price-earnings (PE) multiple of 24 times, in line with its regional peer average. We think its current valuation of 35 times/33 times FY18F/FY19F PE is unjustifiable against its modest 3-year (FY18F to FY20F) EPS compound annual growth rate (CAGR) of 6.7%. We advocate that investors avoid the stock pending an effective execution of its cost savings initiatives.
Potential de-rating catalysts include increased competition from domestic and foreign convenience store players, and slowdown in consumer spending. Upside risks to our call include quicker-than-expected recovery in domestic consumer spending and faster-than-expected execution of its cost savings programme. — CGSCIMB Research, May 24