Valuation / Recommendation

We initiate coverage on Focus Point Holdings Bhd (FPHB) with a BUY recommendation and RM1.15 TP. Our TP is based on 13x FY25F EPS, which is roughly in line with the average valuation of similar consumer retail stocks on Bursa Malaysia. We like FPHB for its leading position and steady growth in the eyewear business, coupled with potential earnings expansion from the turnaround in its F&B business. The stock currently trades at an attractive 8.6x FY25 PE and offers a 4.0% net dividend yield.

Investment Highlights

Optical – steady growth. FPHB is the largest optical retail chain operator in Malaysia, boasting a total of 196 outlets. Even after a strong rebound post COVID-19 pandemic, the sales for its optical segment have remained robust, supported by rising myopia cases among an ageing population. We expect FPHB's optical segment to achieve a 3-year revenue CAGR of 10.9% from FY23-26F, driven by continued outlet expansion (5-8 net openings p.a.) and steady sales growth of 5-7% per outlet. Given the fragmented nature of the optical industry, we believe there is potential for FPHB to expand its market share inorganically (<20% now) by acquiring smaller chain store operators.

F&B – poised for a flavourful comeback. This year, FPHB has achieved a positive shift in earnings for its F&B segment (Komugi), transitioning from an RM1m operating loss in 1H23 to breaking even in 1H24. We believe this positive momentum can be sustained, as the previous issue of excess labour has been fully resolved. We conservatively assume that Komugi’s operating margins could improve to 8-12% in FY25-26F (vis-à-vis the 9.8% achieved in FY22). There could be upsides to our forecasts if corporate sales by Komugi surpass expectations, leading to higher utilisation rate for its central kitchens (currently at around 70%).

Overall, we forecast FY23-26F earnings CAGR of 16.0% for FPHB, driven by healthy retail sales growth alongside outlet expansion for both its optical and F&B segments. Moreover, we believe the current economic backdrop in Malaysia is also quite supportive, characterised by the civil servant pay hikes, partial EPF withdrawals, a likely Rakyat-friendly Budget 2025, and potential hikes in the minimum wage. We expect rising margins for FPHB in FY24- 26F, primarily driven by improving profitability at Komugi.

Risk factors for FPHB include (1) Intense competition; (2) Supply chain disruption; and (3) Dependency on registered optometrists/opticians.

Source: Mercury Research - 15 Oct 2024