9MFY19 within expectations. 9MFY19 CNP of RM42.7m (+10% YoY) came in within both our/consensus expectations, making up 73%/77% of full-year estimates. No dividend was declared for the quarter which is typically paid in 4Q.

YoY, 9MFY19 CNP rose 10% boosted by: (i) stronger turnover (+6%) on a higher store base at 2,382 (+4% YoY, closed 17 stores, 123 new stores opened since Jan 2019) as well as improvement in SSSG at 2.7% (9MFY18: -1.6%) with better consumer promotion activity, and (ii) expansion in PBT margin by 0.2ppt to 3.4% from 3.2% in 9MFY18 buoyed by improved merchandise mix, especially with growth in all food and beverage categories, as well as higher marketing income and improved logistics expenses recovery (on-time suppliers delivery rebates). These more than offset (i) higher effective tax rate of 29.5% (9MFY18: 26.4%) due to higher non-deductible expenses, and (ii) adoption of MFRS 16, which reduced CNP by RM6.0m (lease liability charges recognition).

QoQ, 3QFY19 CNP surged 16% largely from lower effective tax rate of 26.5% (2QFY19: 31.7%), and supported by (i) better turnover (+1%) on a higher store base at 2,382 (+35 new stores) as well as (ii) expansion in PBT margin by 0.3ppt to 3.9% from 3.6% in 2QFY19 from lower lease liability charges recognition with the closure of 6 stores (2QFY19: closed 3 stores). Nevertheless, SSSG was lower at 0.1% compared to 4.0% in 2QFY19.

Outlook. The group noted that they have the capacity to open up to 200 new stores for FY19 (has opened 123 new stores, total of 2,382 stores as at September 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. Nevertheless, 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 MARKET PERFORM 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: lower–than-expected sales, and higher-than-expected operating expenses.

Source: Kenanga Research - 26 Nov 2019