• We deem Senheng’s 1H22 core net profit of RM33.1m (+31.1% yoy) above our expectations due to higher-than-expected margins.
• We expect it to post stronger hoh results in 2H22F on i) seasonality factors with a bumper 4Q, ii) better product mix, and iii) higher operational efficiency.
• Reiterate Add, with a higher TP of RM0.90 (17.4x CY23F P/E) as we raise our FY22-24F EPS by 7.5-12.3% to account for higher margin assumptions.

1H22 core net profit of RM33.1m (+31.1% yoy) above expectations

Senheng’s 1H22 revenue rose 13.5% yoy to RM765.0m, boosted by strong 2Q22 performance on the back of Raya festive sales and more new/upgraded stores, leading to higher sales particularly at its “senQ” digital stations (+11.3% yoy) and “Grand Senheng” stores (+51.1% yoy). We deem 1H22 core net profit above our expectations, at 48.3% of our FY22F estimate, owing to better-than-expected GP and operating margins. 1H22 GP margin expanded to 20.3% (+0.6% pts yoy) on a better product mix while EBITDA margin rose to 8.4% (+0.9% pts yoy), which we attribute to its ongoing internal cost efficiency efforts (enhancing productivity by having trucks cover a wider area and more delivery orders fulfilled per truck) and more cost-effective promotional activities, thanks to targeted marketing via automated digital marketing solutions.

2Q22 core net profit rose to RM20.0m (+68.0% yoy)

Senheng New Retail Bhd’s (Senheng) 2Q22 revenue increased 32.9% yoy to RM397.7m, mainly driven by i) various marketing campaigns (i.e. Raya festive sales, Member Month, and 6.6 Macam-Macam Sales), ii) higher per-store sales on six new/upgraded stores during the quarter, and iii) higher footfall on easing of Omicron wave and full lifting of Covid-19 travel and business restrictions. In addition, 2Q22 GP margin climbed 1.2% pts yoy to 22.1% on a more favourable product mix due to its ongoing store expansion strategy with wider higher-margin product selection, in our view. On top of that, opex as a percentage of revenue declined to 12.7% in 2Q22 (vs. 2Q21: 13.3%), which we believe was due to its ongoing efficiency initiatives yielding higher operational efficiency.

Expecting stronger hoh results in 2H22 on margin expansion 

Going forward, we expect Senheng to post stronger hoh results in 2H22, premised on i) seasonality factor (4Q is typically the strongest quarter, accounting for 42-44% of FY20/21 core net profit on strong year-end and holiday promotional campaigns), ii) more favourable GP margin from its aggressive plan to grow its higher-margin in-house and exclusive products, and iii) higher operational efficiency via ongoing internal efficiency projects and proprietary digital marketing solutions, which should lower its A&P costs.

Reiterate Add, with a higher TP of RM0.90

We reiterate our Add call on Senheng given its effective business execution leading to margin expansion. Hence, we raise our FY22-24F EPS by 7.5-12.3% to account for our higher margin assumptions. Accordingly, our TP is raised to RM0.90 (17.4x CY23F P/E, a 20% discount to CGS-CIMB’s consumer discretionary sector’s 5-year mean P/E of 21.8x). The discount is to account for the competitive nature of the retail E&E sector. We like Senheng for its: i) leading position in consumer electronics, ii) loyal customer base of 3.5m PlusOne members, and iii) wider product offerings vs. peers.