■ We remain neutral on SEM post its 2QFY23 results briefing, as we expect its decent CVS growth to be dragged by its Caring segment in the near term.

■ However, we are encouraged by SEM’s measured approach in its 7-café store expansion and plans to enhance its operational efficiency.

■ Reiterate Hold, with an unchanged TP of RM2.10 (26.7x CY24F P/E). 

Decent CVS sales growth driven by increased store traffic

7-Eleven Malaysia Holdings (SEM) shared at its 2QFY23 results briefing on 28 Aug 2023 that its convenience store (CVS) segment achieved its highest quarterly sales ever in 2QFY23 (Fig 4). This was mainly attributable to: i) higher store count (+24 net new stores in 2Q23), ii) higher footfall, as evidenced by its higher customer count per day per store of 399 (+14% yoy), leading to higher average per store day sales (APSD) of c.RM3,246 (+10.4% yoy), albeit with a lower average basket size of RM8.14 (-3.5% yoy), and iii) higher operating hours (22 hours on average in 2Q23 vs. 18.9 hours in 2Q22). We are also encouraged to see growth across all its product categories, with a relatively stable mix (Fig 2), thanks to its effective marketing campaigns and revamped My7E loyalty app (registered members grew to 1.2m in 2Q23 vs. 0.7m in 1Q23, with over 70% being recurring customers). However, its CVS segment’s GP margin dipped to 31.5% in 2Q23 (-1.5% pts yoy) due to costs incurred to set up its new warehouse (to be operational by end-3Q23F).

Expansion focus on 7-café stores

We view positively SEM’s measured approach in expanding its 7-café format stores. This allows SEM to test the market response towards its fresh -food offerings, reducing wastage and related costs. SEM aims to open 50 new 7-café stores and convert its 100 existing classic stores into 7-café format by end-2023F. Note that 7-café typically has a shorter payback period of 3-4 years as compared to a classic store of 5-6 years, given the former’s higher sales proportion of higher-margin fresh food products. SEM has opened 28 7-café stores in 2Q23, bringing its total to 144 stores (5.7% of its total store count of 2,499). The completion of its new fresh food commissary by end -2023F will help to support its enlarged 7-café store footprint and support its GP margin from FY24F onward, in our view. Besides, we believe its new automated warehouse would improve its operational efficiency in the long run via a higher fulfilment rate, thus further optimising its stores’ product availability and avoiding any sales leakages.

Reiterate Hold with an unchanged TP of RM2.10

We retain our FY23-35F EPS estimates given no major surprises. We maintain our Hold call, with an unchanged TP of RM2.10 (26.7x CY24F P/E, its 5-year mean P/E) as we believe current valuations have accounted for its earnings trajectory and as its near-term CVS earnings growth could still be dragged by weakening margins of its pharmacy segment (Fig 4). Note that its Caring segment is still on track to be disposed by end-2023F. Upside risks: higher-than-expected sales and margin expansion. Downside risks: a sharp increase in operating costs and lower-than-expected store footfall.

Source: CGS-CIMB Research - 06 Sep 2023