1HFY22 earnings came in below expectations. YoY sales improved but margins eroded slightly on account of its strategic move to lock in prices in the first quarter. We expect improvement in margins in the coming quarters due to price adjustments but are cautious on topline for the second half of the year on inflationary concerns. Reducing our FY22E/FY23E earnings by 16%/10%, TP lowered by 9% to RM2.40 (10% reduction). Downgrade to MARKET PERFORM from OUTPERFORM. No adjustment to TP based on ESG which is rated a 3-star as appraised by us.

Results disappointing. 1HFY22 PATAMI of RM242m came in below expectations at only 40%/44% of our full-year forecast and full-year consensus estimate, respectively, as we believe consumers cut back on spending, even on small low-value items as inflation ate into their disposable incomes. DPS of 1.3 sen came short of expectation of 4.6 sen.

Results’ highlights. YoY, 1HFY22 topline grew 20% ending at RM1.95b benefiting from the endemic phase and price increase (in the second quarter). Likewise, gross profit (GP) grew 15% but margin saw 2ppt erosion on account of elevated inputs costs and the company’s strategic move to keep prices low in the first three months of the year. Stripping off the one-off tax penalty (RM7m in 2Q, PATAMI ended 20% higher to RM249m.

Store expansion remained on track for 180 new stores for FY22 with 93 net stores added for 1HFY22 (49 in 1Q). Same-store-sales growth (SSSG) saw a 1.2% decline (vs. our assumption of 4%) dragged by poor sales in 1Q due to Covid restrictions in Feb/March.

QoQ, GP margin improved by 2ppt to 41%, boosted by price increase and normalization of supplies. The reopening of the economy, festive season saw SSSG rebounding by 11% despite the additional 44 new stores.

Key takeaways from the results briefing are as follows:

1. YoY sales were boosted by strong contribution from the April-May festive season and positive contribution from new stores and the endemic phase. Price increase in the beginning of April did not dampened sales during the festive period. However, the company is seeing normalization of sales in June. The company is cautiously optimistic for 2HFY22 as inflationary pressures build up but positive for the final quarter on festivities and year-end demand.

2. GP margin improvement in 2Q came from higher sales and the adjustment in prices. Margins are expected to remain stable throughout the year with FY22 margin expected to end at c.41%. The company guided for a 5-15% increase in sales prices which translate to a 2-3% increase in margins.

3. Its target for 180 new stores in FY22 is on track. The focus will be in and outside of the Klang Valley. The basket size in East Malaysia is significantly higher than in Peninsular Malaysia. Currently, 69% of stores are located outside of the Klang Valley, up by 1ppt from a year ago.

Source: Kenanga Research - 5 Aug 2022