FY19 CNP of RM54.1m (+5% YoY) came in within both our/consensus expectations, at 95% of estimates. The group’s efforts in stores expansion and overhauling its supply chain operation have helped to defend its market leader position as evidenced by 6% rise in sales and 2.5% in SSSG. Maintain MP with a TP of RM1.35 based on 27x FY20E EPS.

FY19 within expectations. FY19 CNP of RM54.1m (+5% YoY) came in within both our/consensus expectations, at 95% of estimates. No dividend was declared for the quarter, but we expect effective DPS of 5.0 sen to be declared later as SEM typically announces its dividend pay-out before the release of its audited annual report.

YoY, FY19 CNP rose 5% boosted by: (i) stronger turnover (+6%) on a higher stores base at 2,411 (+5% YoY, closed 41 stores, 124 new stores opened since Jan 2019) with improvement in SSSG at 2.5% (FY18: -1.4%) from better consumer promotion activity, and (ii) lower effective tax rate of 29.4% (FY18: 29.5%). All these more than offset: (i) contraction in PBT margin by 0.2ppt to 3.2% from 3.4% in FY18 from higher operating expenses in line with higher number of stores, and (ii) adoption of MFRS 16, which reduced CNP by RM11.3m (lease liability charges recognition).

QoQ, 4QFY19 CNP plunged 33%, mainly due to: (i) flat turnover (- 0.2%) especially from lower sales in business area during school holidays, (ii) contraction in PBT margin by 1.2ppt to 2.7% from 3.9% in 3QFY19 from higher lease liability charges recognition in tandem with higher stores base (+41 new stores) and less stores closure of 12 stores (3QFY19: closed 18 stores), and (iii) higher effective tax rate of 29.4% (3QFY19: 26.5%).

Outlook. The group noted that they have the capacity to open up to 200 new stores. Besides stores expansion, the group has been working towards an overhaul of its stores operation and end-to-end supply chain operation, 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. Its wholly-owned Convenience Shopping (Sabah) SB (CSSSB), is still in the midst of acquiring Caring Pharmacy Group Bhd (acquisition of 25.35% of Caring shares was completed on 27th February 2020, with notice of Mandatory Offer served to its board at offer price of RM2.60), and SEM noted that, post-takeover, both stores operations would be operating as usual as there is no synergy in combining them.

Maintain MARKET PERFORM with a TP 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 higherthan-expected operating expenses.

Source: Kenanga Research - 28 Feb 2020