FY17 CNP of RM50.1m (-4%) beat our/consensus expectations by 7%/8% of estimates due to the higher-than-expected other income contribution. We maintain our earnings forecasts as we have factored in sufficient other income contribution. As such, we keep our TP unchanged at RM1.70 based on FY18E price-multiple blended valuation, which implies FY18E PER of 35x, close to the average of 3-year mean Forward PER. Reiterate OUTPERFORM.

FY17 above expectations. FY17 CNP of RM50.1m (-4%) beat our/consensus expectations by 7%/8% due to higher-than-expected other income contribution. No dividend was declared for the year came in as a surprise as the company has been paying out close to 100% of its PATAMI (vs. expected DPS of 3.1sen). Note that, the company did not have dividend pay-out policy.

YoY, FY17 revenue increased by 4% driven by the growth in new stores, higher average spend per customer, improved merchandise mix and consumer promotion activity. Gross profit grew higher than revenue, by 7% as gross profit margin expanded by 0.9pp to 31.6% from 30.7% in FY16, attributed to the improved merchandise mix. Additionally, other operating income was higher by 21% arising from the increase in marketing income by RM11.5m and compensation income from vendors of RM9.3m. Meanwhile, PBT increased at a lower rate of 7% due to the higher operating expenses (+9%), mainly from the new store expansion resulting in higher staff cost, rental cost, store depreciation expenses and utility cost. Nonetheless, net profit fell by 4% due to the higher effective tax rate of 26.9% (FY16:26.3%).

QoQ, 4Q17 revenue declined by 3% due to the long period of school holidays which affected its operation in the high footfalls area within the business districts and lower store opening in the quarter. Nonetheless PBT was higher by 34% attributed to the higher other income (+24%) mainly from the compensation income (at RM9m) and lower operating expenses (-2%) with the lower stores opening. Nonetheless, net profit fell by 2% due to the higher effective tax rate of 36.7% (3Q17:14.3%).

Outlook. 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 as well as resulting 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).

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 like 7-Eleven for the following; (i) increasing sales trend since IPO strengthened by its dominance over the modern convenience chain store (with its 82% market share based on stand-alone convenience store segment, excluding petrol marts), (ii) solid sales growth trajectory underpinned by expected c.150 outlets expansion over the next two years, and (iii) expected earnings recovery with its operation restructuring by closure of underperforming stores and overhauling its stores operation and end-to-end supply chain operations. Risks to our call include: (i) lower-than-expected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 1 Mar 2018