9M17 core net profit of RM34.2m (-20%) came in within expectations at 73%/72% of our/consensus forecasts. No dividend was declared for the quarter, as expected. No changes in earnings assumptions. We maintain our OUTPERFORM call with unchanged Target Price of RM1.70 implies FY18E PER of 35x, which is close to the average of 3-year mean forward PER and 50% premium to Bison’s FY18E PER of 23x.

9M17 within expectations. The reported 9M17 CNP of RM34.2m (- 20%) is within our and consensus expectations at 73% and 72% of fullyear estimates, respectively. No dividend was declared during this quarter, as expected. 7-Eleven typically pays its dividend in the fourth quarter.

YoY, 9M17 revenue increased by 4% to RM1,640.9m due to contribution from 85 new stores and better consumer promotion activities. Gross profit grew higher than revenue, by 7% as gross profit margin expanded by 0.7ppt to 31.5%, attributed to the improved merchandise mix. Additionally, other operating income was higher by 18% arising from commencement of the group’s first main consumer promotion campaign for this year. Nonetheless, PBT plunged to RM46.5m (-21%) no thanks to the higher operating expenses (+10%), mainly caused by the new store expansion resulting in higher staff cost, rental cost, store depreciation expenses and utility cost. Overall, lower effective tax rate of 20.8% (9M16:27.5%) slightly cushioned the negative effects with core net profit registering at RM34.2m (-20%).

QoQ, 3Q17 revenue grew marginally by 1% to RM563.1m driven by 21 new stores’ contribution, higher average spend per customer and better consumer promotional activities. PBT grew higher than revenue by 58% to RM21.8m, with improved PBT margin at 3.9% (+1.4 ppt) attributed to the higher other operating income by 19% arising from marketing income and claims for non-fulfilments against vendors. Coupled with a lower effective tax rate of 14.3% (2Q17:26.6%), core net profit increased at a higher rate of 59% to RM16.1m.

Operation restructuring for cost savings. 7-Eleven is targeting to open at least c.150 new outlets per year over the next two years from FY17 to FY18 (currently at 2,207 stores as of 30th September 2017). Besides stores expansion, the group has been working towards an overhaul in its stores operation and end-to-end supply chain operations with comprehensive plans called the “Back to Basic” and “Changing the Game” programmes. Overall, the move should improve customer experience and results in cost savings in inventory storage, warehouse operations and supply chain cost across different regions. Currently, operating expenses is at c.34% of revenue, and we believe the group is targeting it to be at most at the historical level of c.30% (FY13/FY14).

Post results, we maintain our FY17E/FY18E earnings estimate.

Maintain OUTPERFORM with unchanged Target Price of RM1.70. Our TP is derived from FY18E price-multiple blended valuation, which implies FY18E PER of 35x, which is close to the average of 3-year mean forward PER and 50% premium to Bison’s FY18E PER of 23x. We think our valuation is fair considering: (i) its treasury shares adjusted ROE of 25% is comparable to average regional peers (25%) and also above its local listed peer, Bison, (ii) more resilient sales prospects with its 82% market share (based on standalone convenience store segment, excluding petrol marts), (iii) c.40% bigger market capitalization size than Bison, and (iv) solid growth trajectory with expansion of stores and expected reduction in cost with the operation restructuring. Risks to our call include: (i) lower-thanexpected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 30 Nov 2017