SEM guided for sustained top-line growth driven by new stand-alone 7CAFé stores and the addition of 7CAFé to existing stores,  longer operating hours and the return of tourist spending. Its new fresh food processing facility which can supply to c.1,000 stores in the Klang Valley is on schedule for completion by 4QFY23. We maintain our forecasts, TP of RM2.38 and OUTPERFORM call.

We came away from its analyst briefing yesterday feeling reassured of its prospects. The key takeaways are as follows:

1. SEM guided for sustained top line growth in subsequent quarters driven by: (i) 50 new stand-alone 7CAFé stores and the addition of  7CAFé to 122 existing stores, (ii) strong footfall as its store operation normalises with longer operating hours, and (iii) the return of tourist spending. Meanwhile, the completion of the acquisition of new stores  in Sarawak and a better product mix should boost 2HFY23 earnings.

2. Its food processing unit under QVI Foods Sdn Bhd is now fully  utilized. Its new fresh food processing facility which can supply to  c.1,000 stores in the Klang Valley is on schedule for completion by 4QFY23. We understand that SEM is also expanding their private labels products as more stores come online.

3. SEM started in-sourcing of the distribution of chilled products with its  new chilled distribution centre since July 2022. The new facility will  improve its chilled product supply chain management including inventory management. SEM said that more chilled and fresh food  products will be added to the stores.

4. Meanwhile, its pharmaceutical segment will continue to expand and  improve its merchandise mix to boost margins, to fill the gaps left by high-margin Covid-related products.

Forecasts. Maintained.

We maintain our TP at RM2.38 based on FY24F PER of 28x, in-line with the industry’s average historical 1-year forward PER. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by  us (see Page 4).

We like SEM for: (i) it being a reopening play (manifested in its weekend traffic having already returned to 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 insourcing of product distribution (such as chilled products) as well as improved operating leverage of its food processing unit. Maintain  OUTPERFORM.

Key risks to our call include: (i) its fresh food and ready-to-eat products failing to gain market traction, (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 - 30 May 2023