During its recent briefing, 7-Eleven provided some updates on its recent quarterly performance and progress of its business expansion plan. Maintain BUY and MYR1.98 TP, derived from 25x FY16F P/E (16% upside). Management remains confident over achieving its target of 200 net store openings and store refurbishments this year. The company is also looking to introduce more in-store services in 2015.

• More updates on 1Q15 performance. 7-Eleven Malaysia (7-Eleven) booked a same-store sales growth (SSSG) of 2.4% YoY in 1Q15. This was partly impacted by the severe floods in the east coast of PeninsularMalaysia earlier this year. Overall sales increased 11.5% YoY.
• Expanding in-store services. 7-Eleven also continues to benefit from the expanding of its in-store services, as its commission revenue improved 11.6% YoY. We expect the trend to continue, as the company looks to introduce m ore utilities payment services in the near future. Negotiations are also on-going for it to provide courier-type services.
• Store expansion and refurbishment. The company added 57 net new stores in 1Q15, bringing its total number of outlets to 1,802. On refurbishment of its outlets, a total of 50 stores have undergone the renovation process as at end-1Q15. Hence, we believe that the company is on track to deliver its target of 200 net new store openings and 200 store refurbishments for 2015.
• Other updates. 7-Eleven introduced 140 new stock-keeping units (SKUs) in 1Q15, in an effort to improve merchandise mix. Among the new SKUs launched were various ranges of fresh foods. Management also mentioned that it will continue to invest in monthly and ad hocpromotions to attract more customers.
• Maintain BUY. We make no further changes to our forecasts. Maintain BUY, with our TP unchanged at MYR1.98, based on 25x FY16F P/E. Our target P/E implies an 8% premium over its regional listed peeraverage of 23x, which we believe is justified given its stronger 3-year earnings CAGR of 22.3% for FY14-17 vs its peers’ 14.4%. We remain upbeat on 7-Eleven’s growth prospects, as we beieve its revenue should improve in tandem with its store network expansion. Key investment risks include further slowdown in consumer spending and increasing competition.

1Q15 SSSG. 7-Eleven’s 1Q15 sales increased 11.5% YoY to MYR505m, on the back of SSSG of 2.4% YoY and opening of new stores (57 net new stores in 1Q15). Management shared that the stronger SSSG achieved was partly driven by higher average spending per customer which increased by 11.1% (MYR6.15 vs MYR5.53 in 1Q14). Other key contributors are: i) consistent marketing activities, ii) its continuous effort in renovating its stores, and iii) increase in ASP for 60% of its product range in 2014.

It is worth noting that its SSSG in 1Q15 was also partly impacted by the severe flooding in the east coast of Peninsular Malaysia (Dec 2014-Jan 2015), whereby at its worst, 50 of its outlets were closed. Management mentioned that 12 of those outlets were closed for the whole three months of 1Q15, due to cleaning and renovation process post floods.

More key drivers. During the quarter under review, the growth in 7-Eleven’s merchandise sales was driven by some its key segments: i) non-alcoholic beverages (+7.9% YoY), ii) snacks (+2.2% YoY), iii) confectionaries (+7.7% YoY), and iv) health and wellness products (+8.4% YoY). Commissions (3.4% of 1Q15 total revenue) on the other hand grew 11.6% YoY, in line with our expectation. We expect this trend to continue, as 7-Eleven looks to firm up deals with some other utility players on bill payments services by end-1H15. The group is also in negotiations to test a courier concept, in which customers may order items online and have them picked up at any 7-Eleven store. We believe this will not only channel higher commission revenue to the company via its expanding in-store services, but also drive more traffic into their stores.

On track for delivery. As at end-1Q15, 7-Eleven has opened 67 new stores and closed 10 stores, bringing its net store openings to 57 stores. We deem this on track, as the company is looking to open 200 net new stores in FY15. The new stores opened were mainly located in Klang Valley (approximately 20 stores), while the balance were located in East Malaysia, Johor, Penang, Negeri Sembilan, and east coast of Peninsular Malaysia. Of those new stores, two were opened as the “next generation” stores while seven stores were under “quick-win-food-service” (QWFS) stores. Recall that the former type offers a complete food service infrastructure while the latter is slightly moderated in terms of same service.

On other hand, store refurbishment is also progressing well, with 50 stores beingrefurbished as at end-1Q15. Five stores were refurbished to become “next generation” stores, while 26 were transformed to become QWFS stores. Management is optimistic in reaching its target to refurbish 200 stores in FY15.Other new initiatives and promotions. 7-Eleven introduced new 140 SKUs in 1Q15, in its effort to improve merchandise mix. Among the new SKUs launched were various fresh foods including fresh baked goods (launched on 6 Jun), frozen meals(launched on 16 Feb), hard and soft boiled eggs (launched on 16 Mar), chicken wraps (launched 5 May), and Pocket’s Pie (launched 8 May). The company also introduced its “own-brand” SKUs during the quarter.

Management also mentioned that it will continue to invest in monthly and ad hocpromotions to attract more customers. In 1Q15, it held the the BoBoi Boy redemption promotion (Figure 6), Mountain Dew MYR1 promotion (on 24 Apr), and Slurpee 2015 special edition tumbler promotion.