1H19 CNP of RM25.7m (+17%) at 44%/47% of our/consensus full-year estimates is deemed within expectations as 1H is generally weaker than 2H. 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. Maintain UP with unchanged TP of RM1.35 based on 27x FY20E EPS (which is in line with regional peers’ average PER).

1H19 deemed within expectations. 1H19 CNP of RM25.7m (+17%) at 44%/47% of our/consensus full-year estimates is deemed within expectations as 1H is generally weaker than 2H. No dividend was declared for the quarter as expected, as the group typically pay dividend in 4Q.

YoY, 1H19 CNP surged 17% boosted by: (i) stronger turnover (+7%) on a higher store base at 2,347 (+5% YoY, closed 11 stores, 71 new stores opened since Jan 2019) as well as improvement in SSSG at 4.0% (1H18: -1.6%) with better consumer promotion activity, (ii) expansion in PBT margin by 0.2ppt to 3.2% from 3.0% in 1H18 buoyed by improved merchandise mix, especially with growth in all food and beverage categories, and (iii) adoption of MFRS 16, which increased CNP by RM3.7m (higher depreciation expenses and lower rental expenses). These more than offset the higher effective tax rate of 31.3% (1H18: 25.6%) due to higher non-deductible expenses.

QoQ, 2Q19 CNP rose 31% mainly from: (i) higher GP margin by 1.3ppt to 37.4% from 36.1% in 1Q19 due to improved sales mix, higher marketing income and lower logistics expenses, and (ii) adoption of MFRS 16 which increased CNP by RM1.5m. This was despite: (i) higher effective tax rate of 31.7% (1Q19: 30.1%), and (ii) marginal increase in revenue (+1%) due to lower SSSG compared to the previous quarter of 4.0% (1Q19: 6.0%).

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 is facing stiff competition from new players which are revolutionizing the high-margin fresh-food space, which is challenging its sales growth.

Maintain UNDERPERFROM with Target Price of RM1.35 based on 27x FY20E EPS (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 - 28 Aug 2019