7-Eleven 1H results below expectations

This article first appeared in The Edge Financial Daily, on September 3, 2018.
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7-Eleven Malaysia Holdings Bhd
(Aug 30, RM1.42)
Maintain reduce with a lower target price (TP) of RM1.05:
7-Eleven Malaysia Holdings Bhd registered sales for second quarter of financial year 2018 (2QFY18) of RM557.6 million, notching up a 0.4% year-on-year (y-o-y) growth, while core net earnings jumped 29.4% y-o-y to RM13.1 million. All in, the group’s core net profit for the cumulative first six months of FY18 (1HFY18) of RM22.1 million fell short of our and market’s expectations, making up just 42% of both our and market’s full-year forecasts. As expected, no dividend was declared during the quarter. The earnings shortfall was mainly due to higher-than-expected operating cost.

7-Eleven’s 2QFY18 revenue ticked up 0.4% y-o-y on the back of improved merchandise mix, increased number of stores (+6 new stores in 2QFY18), and continued consumer promotional activities. In spite of the meagre revenue growth, pre-tax profit jumped 32.5% y-o-y to RM18.3 million on the back of lower operating cost and increased operating income. 2QFY18 pre-tax profit margin also improved 0.8% y-o-y to 3.3%.

All in, 1HFY18 turnover increased 1.4% y-o-y to RM1.1 billion while core net profit advanced 21.5% y-o-y to RM22.1 million. This was mostly attributed to higher store count (+16 new stores to 2,241 stores as at end-June), an improved product mix, and increased consumer promotional activities. 1HFY18 gross profit margin expanded 0.9% y-o-y to 32.4% due to a favourable merchandise mix. Taken together with a higher operating income (+6.3% y-o-y), the group’s core earnings increased on a y-o-y basis.

Given that 1HFY18 was below expectations, we reduce our FY18-FY20 earnings per share (EPS) forecasts by 2.4%-9.4% to factor in the higher operating cost on the back of increased rental and utility costs. The group has since revised its target of opening new stores to 100 (from 200 stores a year previously) as it only opened a total of 16 new stores in 1HFY18. So far, the group has also refurbished a total of 99 stores and is on track to meet its target of refurbishing 150 stores a year.

Our “reduce” call is maintained with a lower end-FY18 TP of RM1.05, based on an unchanged calendar year 2019 forecast target multiple price-earnings ratio of 24 times, in line with regional peer average. We think that its current FY18/FY19 price-earnings ratio forecasts of 37 times/34 times are excessive against its sub-par three-year (FY18-FY20) EPS compound annual growth rate of about 6%. We urge investors to steer clear of the stock pending the effective execution of its cost-saving initiatives. — CGSCIMB Research, Aug 29