We  attended  7-Eleven’s  3Q14  briefing  yesterday  and  gathered  some updates  on  the  drivers  behind  its  recent  quarterly  performance  and progress  on  its  business  expansion  plan. Maintain  BUY  and  MYR2.00 TP  (a  25%  upside),  derived  from  28x  FY15F  P/E.  7-Eleven  remainsconfident  of  achieving  net  store  openings  of  600  stores  by  2016  and expanding its margins via an improved products mix. 

Progress  on  store  expansion  and  refurbishment.  Management guided that its  net store openings may be slightly lower than 200 stores this  year,  in  view  of  higher  store  closures  YTD.  However,  7-Eleven reiterated  its  target to achieve  net store openings  of  600 stores by  end-2016. On  the progress of store  refurbishments, 137 stores  in total  have undergone the renovation process as at end-3Q14  and the company is well on track to achieve its target of refurbishing 200 stores by end-2014.  

Building  up  store  infrastructure  for  in-store  services.  Existing  instore  Touch  ‘n  Go  services  continue  to  grow  monthly,  with  7-Eleven working closely with Touch ‘n Go  SB  to ramp up its marketing activities. For  bill  payment  services,  management  shared  that  it  has  signed contracts with Telekom  Malaysia  (T MK, NEUTRAL, TP: MYR6.10)  and Astro Malaysia (ASTRO  MK, NEUTRAL, TP: MYR3.55),  and is looking for a  pilot  to  be  launched  in  December.  Besides  that,  7-Eleven  is  also negotiating with other power and utility services providers. 

Planning  for  a  more  comprehensive  distribution  centre.Management is still re-evaluating itsinitial plan to build its own combined distribution  centre  (CDC), as it  needs  more  time  to monitor  its  product demand  and  change  in  its  products  mix.  To  support  the  planned expansion  into  food  services,  7-Eleven  is  exploring  various  options, which include fresh food and chilled logistics.

Maintain BUY. We make no changes to our  estimate  at this juncture, as we  believe  the  lower-than-expected  net  store  openings  this  year (management  estimated  190  net  new  stores)  will  have  an  immaterial impact  on our earnings assumptions (ie <0.5%). Hence, we maintain our BUY call and MYR2.00 TP, based on 28x FY15F P/E. 

Strong 3Q14 results.  7-Eleven’s 3Q14 sales  increased 11.7% YoY on the  back of same-store sales growth (SSSG) of 4.5% YoY and the opening of new stores (54 net new  stores  in  3Q14).  Management  disclosed  that  average  spending  per  customer has  trended  8.3%  YoY  higher  to  MYR5.83  as  at  9M14,  resulting  in  the  stronger SSSG achieved. We attribute  this to the company’s continuous effort in:  i) renovating its  stores  to  improve  store  traffic,  ii)  persistent  promotional  activities,  and  iii)  the increase in ASPs of 60% of its product range in April. Meanwhile  7-Eleven’s  stronger  other  operating  income  (+11%  YoY)  –  comprising primarily  of  display  incentives,  rebates  from  suppliers  and  space  rental  income(excluding  interest  income)  –  and  better  margins  brought  the  company’s  net  profit higher 109% YoY.   

Lower net store openings in 2014, but target still in sight.  Although management informed  us that its net store openings may be lower this year (estimated at 190 net by  end-2014  vs  our  target  assumption  of  200),  7-Eleven  remains  confident  ofachieving  its  initial  target  of  600  net  store  openings  by  end-2016.  As  at  9M14,  the company opened 140 stores and closed 20, bringing its net store openings to 120 stores. In October and November, the company opened another 33 net new stores, bringing its total number of stores to 1,710 stores YTD.

On  other  hand,  the  progress  of  its  store  refurbishments  is  well  on  track,  with  137 stores  refurbished  as  at  end  3Q14.  With  another  21  stores  being  renovated  in October, 7-Eleven is only another 42 stores away  from  achieving  its full-year target. 
Management is optimistic about exceeding its store refurbishment targets in 2014. Expansion of food services. 7-Eleven is working on providing more food services in its newly-refurbished stores. There will be two types of stores: i) the “next generation” one,  and  ii)  the  “quick  win  food  service”  (QWFS)  variant.  The  former  offers  a complete food services infrastructure while the latter  will provide a slightly moderated version in terms of  the  services offered. 7-Eleven has opened four  “next-generation” stores thus far  and is looking to open another 11 by end-2014. At the  same time, 21 QWFS stores  were opened in October, with management  already setting  a target to expand to 33 stores in 2015.

The  renovation  process  also  allows  7-Eleven  to  offer  more  products  like  frozen ready-to-eat  meals  (which  will  be  rolled  out  to  1,000  stores  by  end-November), bananas, long shelf life cookies and dry cakes (on rack), and  Nescafe  hot beverage machines.

Building up store infrastructure for in-store services.  The  existing  Touch ‘n Goservices  offering  continues  to  grow  monthly,  with  7-Eleven  working  closely  with Touch  ‘n  Go  SB  to  ramp  up  its  marketing  activities.  Meanwhile,  in  terms  of  bill payment services, management  said it  signed  contracts with Telekom  Malaysia  and Astro  Malaysia,  and is looking for  a pilot  to  be  launched  in  December.  7-Eleven  is also  negotiating  with  other  power  and  utility  services  providers.  For  e-commerce services,  the  company  is  looking  to  work  with  AirAsia  (AIRA  MK,  BUY,  TP: MYR3.11))/Tune Ins (TIH MK, BUY, TP: MYR3.00),  eg  upgrades in terms of  in -flight meals and insurance premium payments.

Planning for a more comprehensive distribution centre.  Management disclosed that  it  is  still  reviewing  the  initial  plan  to  build  its  own  CDC,  as  it  will  continue  to monitor product demand and its  products mix  more closely first. As 7-Eleven offers even  more  products  currently  (including  fresh  and  frozen  food),  the  company  is exploring  and  developing  various  options  for  its  initial  plan,  with  a  possibility  of including fresh food and chilled logistics as well.

Risks. Key risks include a potential slowdown in the consumer sentiment, reliance on a few suppliers only, and a business exposed to common operational risks.Forecasts unchanged. We maintain our earnings forecasts for FY14 and FY15,  as we estimate that the lower-than-expected net store openings will have an insignificant impact on our earnings  assumptions. We remain confident that 7-Eleven  will achieve its expansion plan targets.

Maintain BUY, TP unchanged. We remain positive on 7-Eleven’s growth prospects, as  we  believe  its  revenue  should  improve  in  tandem  with  its  network  expansion plans. We  expect  the company’s better product mix and higher commission revenue from in-store services to continue improving its net margins. Maintain BUY, with our TP unchanged at MYR2.00, based on 28x FY15F P/E.

Source: RHB