We visited and were impressed by SEM’s second flagship 7CAFé store in Puchong (one of the only two for now). Leveraging on the ability of its collaborators to draw in and retain traffic, the store command a higher ticket size/customer. We believe the company will put onto the market more 7CAFé stores, which will improve the operational efficiency of its food processing operation with higher volumes and SKUs. Reiterate OUTPERFORM with new TP of RM1.85 (from RM1.70). There is no adjustment to TP based on its ESG rating which is given 3-star as appraised by us.

We recently met up with SEM and visited its second flagship 7CAFé store in Puchong (the first is located in Uptown, Petaling Jaya). The store occupies the ground floor with a floor space of 6k sq ft, carrying convenient and fresh food items while the upper floor is occupied by collaborators. The key takeaways from the engagement are as follows:

1. The store is in collaboration with Niko Neko Matcha (beverage), BookXcess (discounted bookstore) and various imported beauty products. These collaborators draw and retain the traffic in the store, resulting in a doubling in the average ticket size/customer as compared to a normal convenient store (CVS).

2. Meanwhile, SEM’s food processing unit QVI Foods Sdn Bhd has seen its utilization hitting 60-70% currently, surpassing its pre-pandemic level of c.50%. Currently, it caters to c.1,000 CVS in the Klang Valley. We understand that an expansion plan could be on the drawing board, with more stores (including 7CAFé stores) and SKUs being added.

3. SEM has started in-sourcing the distribution of chilled products with its new chilled distribution centre in coming online on 25th July 2022. The new facility will improve its chilled product supply chain management including inventory management as well as a higher delivery frequency of 13 times per month per store vs. only three times previously (under third-party operators).

4. SEM maintained its guidance for a net addition of 100 stores (CVS and & 7CAFé combined) in FY22 (which is in line with our assumption). We estimate that the capex for CVS and 7CAFé are RM250k/store and RM500k/store, respectively. Given a better product mix, we estimate that the 7CAFfé has a shorter payback of 3-4 years (vs. 5-7 years for CVS).

Forecasts. We maintain FY22E forecast based on unchanged assumption of a net addition of 100 stores and same-store sales growth (SSSG) of 4%. We raise our FY23E earnings by 17% based on an assumption of net addition of 110 stores (from 50 stores) and SSSG of 4% (from -1.9%) to impute better product mix and sustained consumer spending.

Maintain OUTPERFORM with new TP of RM1.85 (from RM1.70) by 9% as we roll over to FY23E earnings with an ascribed PER of 24x, which is at c.15% above to the industry’s historical average 1-year forward PER of 21x and its peers. We like SEM for: (i) it being a reopening play (manifested in its weekend traffic having already returned to the pre-pandemic level of about 300 customers/day, and poised for further growth); (ii) its long-term growth potential driven by 7CAfé stores; and (iii) efficiency gains from in-sourcing of product distribution (such as chilled products) as well as improved operating leverage at its food processing unit.

Key risks to our call include: (i) return of movement restrictions, hurting traffic to the stores; (ii) playing field gets more crowded with new entrants or aggressive expansion by existing competitors; and (iii) long-term implication from the generational tobacco ban.

Source: Kenanga Research - 2 Aug 2022