9M18 CNP of RM38.8m (+13%) came in within both of our/ consensus expectations at 75% each of full-year estimates. The group’s stores operation rationalization strategy are bearing fruits with improving margin, albeit at a slow pace. Nevertheless, we cut our TP to RM1.30 (from RM1.55) based on lower 27x FY19E EPS (from 33x FY19E EPS), which is in line with regional peers’ average PER, given the stiff competition and saturated market in the modern convenience stores space, directly related to the regional market trend. Maintain MP

9M18 in line. 9M18 CNP of RM38.8m (+13%) came in within both of our/consensus expectations at 75% each of full-year estimates. No dividend was declared, as expected. The group typically pay its dividend in the 4Q.

YoY, 9M18 CNP rose 13% despite a marginal increase in revenue (+1%), attributed to the expansion in PBT margin by 0.5ppt to 3.2% from 2.7% in 9M17 buoyed by the improved merchandise mix, especially by the overall growth in all food and beverage categories as well as higher other operating income (+8%) arising from the increase in marketing income. The marginal increase in revenue was due to lower new stores opening at 52 new stores (currently, at 2,259 stores as of September 2018) as the group is focusing only on stores refurbishments (at 113 stores) to modernize and enhance stores appeal as well as expanding the space for its fresh food and beverages offerings.

QoQ, 3Q18 CNP surged 28% attributed to: (i) higher other operating income (+21%) arising from the increase in marketing income, (ii) the expansion in PBT margin by 0.2ppt to 3.9% from 3.7% in 2Q18 buoyed by the improved merchandise mix as the group increased its fresh food and beverages offerings, (iii) higher sales (+2%) mainly from the zero- rated tax holiday, and (iv) lower effective tax rate at 24.5% (2Q18: 24.9%).

Outlook. 7-Eleven is targeting to open at most c.100 net new outlets for FY18 (currently at 2,259 stores as at September 2018). Besides stores expansion, the group has been working towards an overhaul of its stores operation and end-to-end supply chain operations, which are showing results with the improving margin, albeit at a slow pace. The group has been facing stiff competition from new players which are revolutionizing the high-margin fresh-food space, which is limiting its sales growth.

We cut our Target Price to RM1.30 (from RM1.55) as we ascribed lower valuation basis at 27x FY19E EPS, which is in line with regional peers’ average PER (from the basis of 33x FY19E EPS), given the stiff competition and saturated market in the modern convenience stores space, directly related to the regional market trend. Nevertheless, its stores operation rationalization strategy is bearing fruits with the improving margin, albeit at a slow pace. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 03 Dec 2018