1H18 CNP of RM21.9m (+21%) appears to be below our/consensus expectations at 42%/41% of full-year estimates; however, we deemed the results to be in line on seasonally stronger 2H from longer school holiday and other festive season (i.e. Christmas), as well as being supported by the remainder of zero-rated tax holiday. Maintain MARKET PERFORM with an unchanged TP of RM1.55.

1Q18 deemed in line. 1H18 CNP of RM21.9m (+21%) appears to be below our/consensus expectations at 42%/41% of full-year estimates; however, we deemed the results to be in line on seasonally stronger 2H from longer school holiday and other festive season (i.e. Christmas), as well as being supported by the remainder of zero-rated tax holiday. No dividend was declared, as expected.

YoY, 1H18 CNP surged 21% despite marginal increase in revenue (+1%), attributed to the expansion in PBT margin by 0.7ppt to 3.0% from 2.3% in 1H17 buoyed by the improved merchandise mix, especially by the overall growth in all food and beverage categories as well as higher other operating income (+6%) arising from the increase in marketing income. Additionally, effective tax rate was also lower at 25.8% (1H17:26.6%). The marginal increase in revenue was due to lower new stores opening at 29 new stores (currently, at 2,241 stores as of June 2018) as the group is focusing only on stores refurbishments (at 99 stores) to modernize and enhance stores appeal as well as expanding the space for its fresh food and beverages offerings.

QoQ, 2Q18 CNP surged 50% attributed to: (i) the expansion in PBT margin by 1.5ppt to 3.7% from 2.2% in 1Q18 buoyed by the improved merchandise mix as the group increased its fresh food and beverages offerings, (ii) higher sales (+4%) from the combination of zero-rated tax holiday, Hari Raya festive season and 14th general election, and (iii) lower effective tax rate at 24.9% (1Q18: 27.2%).

Outlook. With the zero-rated GST starting 1st June 2018, 7-eleven, which had previously absorbed GST into their respective merchandising prices, has cut its selling prices for the 6%-rated products, which encourage consumer to loosen their purse strings. 7-Eleven is targeting to open at least c.100 new outlets for FY18 (currently at 2,241 stores as at June 2018). Besides stores expansion, the group has been working towards an overhaul of its stores operation and end-to-end supply chain operations. However, we believe that this move will take a longer time to achieve, depending on the current pace. The group has been facing stiff competition from new players which are revolutionizing the high- margin fresh-food space.

Maintain MARKET PERFORM with unchanged TP of RM1.55 based on 33x FY19E EPS, which is close to the 3-year mean of Forward PER given its 82% leading market share based on stand-alone convenience store segment, excluding petrol marts.

Risks to our call includes: (i) lower-than-expected sales, and (ii) higher- than-expected operating expenses.

Source: Kenanga Research - 30 Aug 2018