7-Eleven’s 1Q15 results were slightly below expectations, achieving only about 18% of our and consensus estimates. Maintain BUY with a higher TP of MYR1.98 (from MYR1.85, 17% upside), after rolling over our base year to 2016. Although we trim our FY15-17 earnings forecasts, we believe the company’s growth over the next few years is intact, with its expansion plan remaining on track.

• Recorded growth. 7-Eleven Malaysia’s (7-Eleven) 1Q15 revenue rose 11.5% YoY to MYR505m, mainly driven by growth in new stores, improved merchandise mix and increased promotional activities. Meanwhile, its net profit increased 23.7% YoY to MYR14.4m, due to GPM expansion (30.4% vs 1Q14’s 27.5%) and higher other operating income. Sequentially, 1Q15 revenue was seasonally higher, while earnings decreased by 19.7% due to higher other operating income earned from various full-year rebates in 4Q14.
• Margins. We believe the GPM expansion achieved during the quarter can be attributed to 7-Eleven’s effort in improving its product mix. This was done by focusing on increasing its contributions from higher-margin products like fresh food. The group has also been expanding its in-store services offerings to improve its revenue frm commissions.
• Forecasts and risks. As we are cautious on the impact of the goods and services tax (GST) on overall consumer spending, we further lower our FY15-17 earnings forecasts by 4.8%-6%, factoring in slower sales growth. Key investment risks include further slowdown in consumer spending and reliance on only a few suppliers.
• Maintain BUY. We revise our TP to MYR1.98 (from MYR1.85) after rolling over our valuation to FY16. Our TP is based on a revised FY16FP/E of 25x, which implies an 8% premium over its regional listed peers’ average of 23x. We believe the premium valuation is justified given its stronger 3-year earnings CAGR of 22.3% for FY14-17 vs its peers’average of 14.4%. Our ascribed 25x FY16F P/E also implies an undemanding 0.96x PEG vs peers’ average of 1.73x. We remain positive on 7-Eleven as we believe its growth strategies are intact, with thecompany’s new store expansion plan remaining on track.