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This article first appeared in The Edge Financial Daily on November 27, 2019

7-Eleven Malaysia Holdings Bhd
(Nov 26, RM1.41)
Upgrade to hold with a higher target price (TP) of RM1.42:
7-Eleven Malaysia Holdings Bhd’s (SEM) third quarter of financial year 2019 (3QFY19) results were above our and consensus’ expectations on operational efficiency gains from its combined distribution centre. We raise our FY19 to FY21 earnings estimates by 6% to 10%, roll forward our TP valuation to FY20 estimate and derive a TP up 14% to RM1.42 based on 27 times FY20 price-earnings ratio. With a total return of only 2%, we upgrade SEM to a “hold” call. Our preferred pick in the convenience store retailing is Mynews Holdings Bhd (“buy”; TP: RM1.58) for its potential margin expansion through higher food and beverage sales.

SEM’s 3QFY19 core net profit of RM17 million, or +1% year-on-year (y-o-y) and +16% quarter-on-quarter (q-o-q), brought its nine months (9MFY19) core net profit to RM43 million (+10% y-o-y) — 83% and 77% of our and consensus’ full-year earnings estimates. This was predominantly due to lower-than-expected selling and distribution expenses from efficiency gains at its combined distribution centre — for instance, a better inventory management — and lower staff benefits.

Its 3QFY19 revenue grew 5% y-o-y driven by a higher sales volume, new store growth and better marketing and promotional activities. Its gross profit margin also improved 0.2 percentage point (ppt) y-o-y to 37.2% on a better sales mix. SEM’s 3QFY19 same-store sales growth (SSSG) was flat (+0.1%) but its 9MFY19 SSSG remained positive at +2.7% versus 9MFY18’s SSSG of -1.6%.

SEM’s pre-tax profit grew slightly at 4% y-o-y led by a higher administrative expense from increased staff costs and higher finance costs from the impact of Malaysian Financial Reporting Standard 16 implemented on Jan 1, 2019. Meanwhile, a higher tax of 26.5% (+2 ppts y-o-y) resulted in a lower net profit growth of 1% y-o-y.

In 9MFY19, SEM opened 95 new stores, bringing its total stores to 2,382. We believe SEM is unlikely to meet its store opening target of 200 stores for FY19. We have lowered our new store opening assumptions to 125 stores per annum for FY19 to FY21, from 150 stores annually previously. After adjusting for lower sales and distribution expenses and new store opening assumptions, our FY19, FY20 and FY21 earnings estimates are raised by 10%, 6% and 6% respectively.

There are several risks for our earnings estimates, TP and SEM rating. As tobacco sales make up an estimated 30% to 35% of SEM’s total sales, any unfavourable regulatory changes — for instance, excise tax shocks — may impact SEM’s earnings. Additionally, higher operating expenses via another minimum wage hike could negatively impact earnings growth. — Maybank IB Research, Nov 26

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