7-Eleven Malaysia Holdings Bhd (Trading Buy)

• SEM now has a direct exposure to the retail pharmacy business following the full completion of its acquisition of Caring Pharmacy Group (CPG) on 9 June this year. With a 75% stake in CPG (which operates more than 100 pharmacy stores under the ‘CARiNG’ brand name), this diversification move will complement the Group’s existing core business of operating and franchising of convenience stores under the ‘7-Eleven’ brand name.
• Technically speaking, the stock has recently overcome a medium-term negative trendline when it climbed to a high of RM1.41 on 10 July. After gyrating sideways since then, its share price (which ended at RM1.38 yesterday) could rally ahead to continue its trend reversal pattern.
• A renewed buying momentum is expected to propel the stock to reach our resistance target of RM1.57 (R1; 14% upside potential) before rising towards the next resistance level of RM1.65 (R2; 20% upside potential).
• We have identified our stop loss level at RM1.25 (which represents a 9% downside risk).
• In terms of earnings outlook, the Group – which posted a net profit of RM11.4m (+2% YoY) in 1QFY20 (dragged by a corporate exercise cost of RM5.9m incurred to acquire CPG) – is projected to make RM58m in FY20 and RM62m in FY21 based on consensus expectations. This translates to forward PERs of 27.2x this year and 25.4x next year.
• It is also worth highlighting that SEM has been buying back its own shares recently (totalling 2.7m shares that were purchased between 10 July and 16 July at an average price of RM1.39 per share), thus providing share price support

Federal International Holdings Bhd (Trading Buy)

• FIHB – a furniture manufacturer that has also diversified into the construction business – is a potential beneficiary of a shift in trade flows in the event that the US-China trade war escalates.
• The Company was in the news recently when listed Muar Ban Lee Group (MBL, which is in the oil palm business) was reportedly interested to take over FIHB. MBL has previously acquired a 5.1% stake in FIHB (which has since been diluted to below 5% following the conversion of preference shares by its major shareholder into ordinary shares of FIHB).
• On the chart, the stock has broken out from a downward sloping trendline that stretches back to April 2017. After reaching a high of RM0.64 about one month ago, the stock has pulled back gradually amid falling trading volume. It closed 5.9% higher at RM0.45 yesterday.
• A resumption of buying interest could lift its share price towards our resistance thresholds of RM0.52 (R1) and RM0.59 (R2). This translates to upside potentials of 16% and 31%, respectively.
• Our stop loss level is pegged at RM0.39 (13% downside risk).
• Meanwhile, FIHB made a net profit of RM1.4m (-27% YoY) in 3QFY20, taking YTD earnings to RM5.0m (-12% YoY)

Source: Kenanga Research - 23 Jul 2020