1Q19 CNP of RM11.2m (+25% YoY, -11% QoQ) at 19%/20% of our/consensus full-year estimates is deemed within expectations as 1Q is generally the weakest quarter. Maintain UP with a higher TP of RM1.35 from RM1.30 as we roll over to FY20E valuation based on an unchanged PER of 27x, in line with regional peers’ average.

1Q19 deemed within expectations. 1Q19 CNP of RM11.2m (+25% YoY, -11% QoQ) is deemed within expectations of our/consensus at 19%/20% of full-year estimates. 1Q is generally the weakest quarter for the group. No dividend was declared for the quarter as expected, as the group typically pay dividend on 4Q.

YoY, 1Q19 CNP surged 25% boosted by: (i) stronger revenue (+9%) on a higher store base at 2,311 (+3%) as well as improvement in SSSG at 6.1% (1Q18: -0.9%) and better consumer promotion activity, and (ii) expansion in PBT margin by 0.5ppt to 2.8% from 2.3% in 1Q18 buoyed by improved merchandise mix, especially with growth in all food and beverage categories. This more than offset the higher effective tax rate of 30.7% (1Q18: 26.8%) due to higher non-deductible expenses. Note that for 1Q19, the group closed down eight underperforming stores and opened 32 new stores with total 2,311 stores.

QoQ, 1Q19 CNP plunged 11% dragged down by lower GP margin by 1.5 ppt to 36.1% from 37.6% in 4Q18 due to unfavourable sales mix, lower marketing income and higher logistics expenses. This was despite (i) lower effective tax rate of 30.7% (4Q18: 40.8%), (ii) higher revenue (+5%) from higher stores base (+1%), and (iii) better operating expenses allocation of 32% (4Q18: 34% of sales).

Outlook. The group noted that they have the capacity to open up to 200 new stores for FY19 (currently at 2,311 stores as at March 2019). 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 challenging its sales growth.

Maintain UNDERPERFROM with a higher TP of RM1.35 from RM1.30 as we roll over our valuation base to FY20E (from FY19E) based on unchanged PER of 27x, which is in line with regional peers’ average PER.

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

Source: Kenanga Research - 30 May 2019