1QFY20 CNP of RM17.3m (+55% YoY, +52% QoQ) came in at 31%/29% of our/consensus full-year estimates, is deemed within our expectation as we expect 2QFY20 to be generally slower with the prolonged MCO and Ramadhan month. Note that, SEM stores (except for those in malls) being categorised as essential services, remained operational during Movement Control Order (MCO) period. Maintain MP with a higher TP of RM1.30 (from RM1.25) as we roll over the valuation base to FY21E EPS (from FY20E EPS) based on unchanged PER of 27.0x.

1QFY20 deemed within expectation. 1QFY20 CNP of RM17.3m (+55% YoY, +52% QoQ) came in at 31%/29% of our/consensus fullyear estimates, is deemed within our expectation as we expect 2QFY20 to be generally slower with the prolonged MCO and Ramadhan month. The CNP excluded a one-off recognition of RM5.9m due to a corporate exercise in acquiring Caring Pharmacy Group Bhd. No dividend was declared, as SEM typically paid its dividend after annual report announcement.

Results’ highlights, 1QFY20 CNP soared 55% YoY, 52% QoQ boosted by: (i) stronger turnover (+6% YoY, +5% QoQ) on higher stores base of 2,419 (+5% YoY, 26 stores closed, 34 new stores opened since Jan 2020) from better consumer promotion activity, and (ii) expanded PBT margin to 3.2% from 2.8% in 1QFY19, and 2.7% in 4QFY19 mainly from high-margin segment of fresh food (+13% YoY) and tobacco (+7% YoY) during MCO. Note that, SEM stores (except for those in malls) remained operational during Movement Control Order (MCO) period being categorised as essential services. All these more than offset: (i) contraction in SSSG at 1.9% (1QFY19 SSSG: 6.1%) due to some stores closures during MCO, (ii) higher effective tax rate of 42.4% (1QFY19:30.7%), and (iii) higher operating expenses in line with higher number of stores.

Outlook. The group noted that they have the capacity to open up to 200 new stores yearly. Besides stores expansion, the group has been working towards an overhaul of its stores operation and end-to-end supply chain operation. Nevertheless, the group is facing stiff competition from new players which are revolutionizing the highmargin fresh-food space, which is challenging its sales growth. Its wholly-owned Convenience Shopping (Sabah) SB (CSSSB), and related person in concert (PAC) has acquired Caring Pharmacy Group Bhd (at offer price of RM2.60, to be fully completed in 2QCY20) which had been delisted on 8th May 2020. SEM noted that post-takeover, both stores operations would be operating as usual as there is no additional synergy in combining them.

Maintain MARKET PERFORM with a higher TP of RM1.30 (from RM1.25) as we roll over the valuation base to FY21E EPS (from FY20E EPS) based on unchanged PER of 27.0x (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 - 29 May 2020