We held a conference call with Focus Point and came away feeling neutral about the group’s prospects going forward. As the meeting yielded no surprises, we keep forecasts unchanged. While we are positive on Focus Point’s pivot to e-commerce and cost savings from rental waivers and reduction in staff cost, we don’t believe it will be sufficient to make up for the lost revenue from brick and mortar sales. Maintain HOLD with a higher TP of RM0.40 based on a higher 9.0x PE multiple (from 8.5x previously) of mid-FY21 earnings.

We held a conference call with Focus Point and came away feeling neutral about the group’s near term prospects going forward.

Pivot to e-commerce. Focus Point shared they are scaling up their e-commerce presence in response to the forced closure of their brick and mortar optometry outlets. Focus Point will (i) increase the range of eyewear available for sale online, (ii) introduce “virtual try on” technology which allows customers to virtually try on frames via webcam, (iii) launch a contact lens delivery subscription service and (iv) offer an “optometry on the call” service for customers that would like an optometrist visit their home for vision checks and frame fittings. Focus Point have shared that their e commerce sales have increased 5-fold MoM in April. While we are encouraged by this, we understand e-commerce sales are still a fraction of the physical sales.

Cost savings in the form of rental waivers and staff taking unpaid leave. While some shopping mall operators have already waived rental payments for the duration of the MCO, others are still in discussion with Focus Point. We had estimated Focus Point’s total rent cost in FY20 to amount to ~RM35m. Depending on the duration of the MCO and number of shopping malls offering rental waivers, we estimate the rental savings to amount to between RM2-6m. With regards to staff cost, we understand that employees employed under franchised Focus Point optometry stores (~70 of the total 180 Focus Point stores) are paid by franchisee owners. For optometry stores directly run by Focus Point, a portion of in store staff undertaking unpaid leave during the duration of the MCO is estimated to reduce staff cost by RM1.5-3.5m.

Outlet count to decline. Even before the Covid-19 outbreak and subsequent MCO, Focus Point had intended to close 6-7 non-performing stores. With the occurrence of Covid-19, we expect the number of store closures to be higher. Note that franchise operated stores incur their own labour and rent cost. Despite Focus Point sharing that they intend to provide support in this trying time, we still expect number of these stores to face cash flow issues. All planned store openings in FY20 have been scraped for the time being. We had previously expected a net 6 increase in the number of optometry stores.

Central Kitchen corporate sales still stable. Despite some corporate clients shutting down business operations (resulting in the absence of sales to those clients), the increase in the number of SKUs to Focus Point’s convenience store client was sufficient to make up for lost volumes.

Forecast. As the meeting yielded no surprises, we keep forecasts unchanged.

Maintain HOLD, TP: RM0.40. While we are positive on Focus Point’s pivot to e commerce and cost savings from rental waivers and reduction in staff cost, we don’t believe it will be sufficient to make up for the lost revenue from brick and mortar sales. Maintain HOLD with a higher TP of RM0.40 of 9.0x PE multiple (from 8.5x previously) on mid-FY21 earnings. With the relaxation of MCO rules signalling a possible end to the lockdown altogether (after 3 rounds of extension), we feel it justified to raise our PE multiple given better clarity to earnings.

Source: Hong Leong Investment Bank Research - 11 May 2020