This article first appeared in The Edge Financial Daily, on 30 November, 2015.

7-Eleven Malaysia Holdings Bhd
(Nov 27, RM1.40)
Maintain hold call with an unchanged target price of RM1.65: We make no changes to our earnings per share forecasts and our “hold” rating. 

We believe that domestic consumer confidence is still weak, but we expect 7-Eleven Malaysia Holdings Bhd’s growth to be sustained, led by its store expansion plans which should allow it to hold onto its leading market position. 

For exposure to the Malaysian consumer sector, we prefer QL Resources Bhd.

7-Eleven’s third quarter ended Sept 30, 2015 (3QFY15) core net profit jumped 25.6% year-on-year (y-o-y) to RM16.7 million, on the back of a 6.6% y-o-y increase in revenue to RM519.2 million.

For the cumulative nine-month period (9MFY15), revenue increased 6.7% y-o-y to RM1.51 billion, resulting in a 1.2% y-o-y rise in core net profit to RM41.9 million. 

9MFY15 made up 66% of our full-year forecast and 68% of the consensus. We consider this broadly in line, as we expect a strong 4QFY15, which is historically 7-Eleven’s strongest quarter.

Revenue rose 6.6% y-o-y, driven by new store additions, an improved merchandise mix and consumer promotion activities. 

The growth was achieved despite the ongoing retail market negativity caused by the goods and services tax (GST) and declining consumer confidence. 

However, selling and distribution expenses increased 10.4% y-o-y, mainly due to new store expansion, resulting in higher staff costs, rental costs and 

store depreciation expenses.

Revenue grew 6.7% y-o-y to RM1.51 billion, mainly due to new store additions (total stores as at Sept 30: 1,883), an improved merchandise mix and consumer promotion activities. 

Gross profit increased 11.9% y-o-y to RM460.5 million due to revenue growth and a gross margin expansion of 1.5 points.

However, selling and distribution expenses increased 14.2% y-o-y, mainly due to higher staff costs, rental costs and store depreciation expenses in tandem with the store expansion.

7-Eleven recorded sequential improvements as well. Revenue rose 7.7% quarter-on-quarter (q-o-q), while core net profit surged 55.9% q-o-q. 

We believe that the improvements were due to 2QFY15 being severely affected by the implementation of the GST and consumers holding back their purchases. We expect the improvements to continue in 4QFY15. — CIMB Research, Nov 27