7-Eleven Malaysia Holdings Bhd
(June 2, RM1.71)
Maintain hold with a target price of RM1.70: In an analyst briefing this week, 7-Eleven highlighted that it is on track to achieve its targeted number of new stores and store refurbishment. It will also continue to expand in-store services and invest in adveretising and promotions to attract customers. 

Aside from its plan to build its own distribution centre which is still under consideration, other plans set during the initial public offering (IPO) are generally progressing well.

We maintain our earnings forecasts as well as our target price, which is based on 23.6 times calendar year 2016 (CY16) price-earnings ratio (PER) (20% premium over peer average). The stock remains a “hold” as we believe that its strong performance has been priced in. We prefer QL Resources Bhd which offers strong earnings growth at a cheaper valuation.

We, along with some 10 analysts, attended 7-Eleven’s results briefing for the first quarter of 2015 ended March (1QFY15). It was chaired by chief executive officer (CEO) Gary Brown. Chief financial officer (CFO) Lim Heng Seong, deputy CEO Ho Meng and executive director Tan U Ming were also present. 

It started with a presentation by the CEO who talked about the drivers of the stronger 1Q results and the group’s growth strategies. 

Key takeaways were the bulk of the same-store-sales growth  was driven by the selling price hike in the previous year. It is on track to achieve its targets of 200 net new stores and store refurbishment per year.  

Also, more in-store services will be launched, and the group is still evaluating its plan to build its own combined distribution centre; it is monitoring product demand and the change of product mix more closely first.

There were no major surprises. Aside from its distribution centre project, other plans set during the IPO are generally progressing well. Although 1Q met only 20% of our full-year forecast, we deem it to be in line as we expect the new stores opened in 1Q to start contributing more significantly in the next few quarters. 

We also expect the recovery from the East Coast floods to help boost results. While the overall retail market could be soft in 2Q, we expect 7-Eleven to perform better than the industry given that it sells mainly small and inexpensive items. 

Hence, it is less likely to be significantly affected by the slower consumer spending. In fact, it has been able to perform above the industry average since listing.

Stay on the sidelines. Although its performance has been encouraging and it appears on track to achieve its targets we think this has been priced in. We believe that 7-Eleven is fairly valued for now. — CIMB Research, June 2

This article first appeared in The Edge Financial Daily, on June 3, 2015.