7-Eleven Malaysia Holdings Bhd
(Nov 24, RM 1.64)
Maintain hold with a target price (TP) of RM1.78: 7-Eleven’s revenue for the first nine months of financial year 2014 ending December (9MFY14) increased by 12.9%, while net profit increased by 34.3% year-on-year (y-o-y). The stronger revenue was driven by same-store-sales growth of 4.5% and growth in the number of stores from 1,557 in 2013 to 1,677 in 9MFY14, still 80 stores away from its target of 200 new stores per year.

While gross profit improved by 0.5 percentage point (ppts) y-o-y due to higher selling prices, higher economies of scale and better product mix, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin improved more at 0.8 ppts y-o-y, driven by the higher operating income (excluding interest income). This offset the higher selling and distribution expenses due to expansion and lower net interest income, resulting in higher net profit y-o-y. In terms of the third quarter (3Q) of FY14 against 3QFY13, revenue increased by 11.7% y-o-y due to  the opening of new stores, better product mix and consumer promotion activity. Net profit jumped 109% y-o-y, mainly due to the: i) higher other operating income; ii) substantially lower administrative and other operating expenses (32% y-o-y) as the group incurred higher advertising and promotion (A&P) cost for its Hello Kitty promotional campaign in August 2013; and iii) much lower effective tax rate.

Although 7-Eleven’s 9MFY14 results are better y-o-y,  growth is slower than expected, mainly due to lower-than-expected commission income, other operating income and margin expansion. We think 7-Eleven may not be able to achieve its new openings target. In view of its weaker-than-expected 9MFY14 results and the slower consumer spending, we think it is unlikely to achieve our previous forecast of three-year earnings per share compound annual growth rate of 29%.

We cut our FY14 to FY16 earnings forecasts and TP, which is based on a lower target price-earnings ratio (PER) of 23.6 times 2016 (2015 previously, 20% premium over its peers’ average) or in line with the lower average peer PER. Its growth remains above the sector’s average. We maintain our “hold” call. For exposure to the local consumer sector, we prefer Berjaya Food Bhd that trades at a more attractive valuation but comes with much stronger earnings growth. — CIMB Research, Nov 23

This article first appeared in The Edge Financial Daily, on November 25, 2014.