FY18 CNP of RM51.3m (+2%) came in within our/consensus expectations at 99%/97% of full-year estimates. No changes to our FY19E CNP and TP of RM1.30 based on 27x FY19E EPS, which is in line with regional peers’ average valuation. Nevertheless, we downgrade it to UP from MP, given the limited growth amid stiff competition and saturated market of the modern convenience stores space.

FY18 in line. FY18 CNP of RM51.3m (+2%) came in within our/ consensus expectations at 99%/97% of full-year estimates. No dividend was declared for the quarter. However, the group typically declared its final dividend in May, after publishing its annual report, which we expect a final DPS of 4.0 sen (FY17:4.0 sen).

YoY, FY18 CNP rose 2% despite a marginal increase in revenue (+1%), attributed to the expansion in PBT margin by 0.6ppt to 3.8% from 3.2% in FY17 buoyed by the improved merchandise mix, especially the overall growth in all food and beverage categories. The marginal increase in revenue was due to lower new stores opening and average sales per store, as the group is focusing only on stores refurbishments to modernize and enhance stores appeal as well as expanding the space for its fresh food and beverages offerings.

QoQ, 4Q18 CNP plunged 25% attributed to: (i) higher effective tax rate at 40.8% (3Q18: 24.5%), (ii) lower sales (-2.5%) mainly from the higher sales base in 3Q18 zero-rated tax holiday, as well as lower sales in the office space areas during extended holidays, and (iii) the contraction in PBT margin by 0.1ppt to 3.8% from 3.9% in 3Q18 pared by unfavourable merchandise mix as the group fresh food and beverages offerings contribution was lower due to school holidays and extended holidays.

Outlook. We believe that 7-Eleven is planning to open at most c.100 net new outlets for FY19 (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 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.

Downgrade to UNDERPERFORM from MARKET PERFORM with an unchanged Target Price of RM1.30 based on 27x 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.

Key risks to our call include: higher–than-expected sales, and lowerthan-expected operating expenses.

Source: Kenanga Research - 27 Feb 2019