During its recent briefing, 7-Eleven revealed a respectable 2QFY15 SSSG of -1.5 YoY but a full margin recovery remains unlikely. Maintain NEUTRAL with a TP of MYR1.36 (9% downside), derived from a 23x FY16F P/E. Management is confident of achieving its target of 200 net store openings and store refurbishments this year. More in-store services have been secured as well.

More updates. 7-Eleven Malaysia (7-Eleven) has booked a goods and services tax (GST)-adjusted same-store sales growth (SSSG) of -1.5% YoY in 2Q15. While SSSG remains respectable amidst post GST implementation, we are cautious of its outlook due to a limited margin recovery. This is due to the GST-driven amendments to the Price Control Anti-Profiteering Act 2011 that prohibits prices from being raised until Jun 2016 if they result in higher margins and macroeconomic headwinds.

Store expansion and refurbishment on track. 7-Eleven has added 52 net new stores in 2Q15, bringing its total number of outlets to 1,854. On refurbishment of its outlets, a total of 102 stores have undergone the renovation process as at YTD 2Q15. Hence, we believe that the company is on track to deliver its target of 200 net new store openings and 200 store refurbishments for FY15.

Expanding in-store services. The company has completed an agreement with BOXiT SB, which allows customers to pick up online orders at their preferred 7-Eleven stores. This commences in 4Q15. While it is expected to be minimally accretive to earnings, we make no changes to earnings pending further clarification from management.

Other updates. An agreement was signed with Syarikat Bekalan Air Selangor SB (Syabas) that would provide water bill payment services in stores from late 3Q15 onwards. 7-Eleven has also introduced 231 new stock-keeping units (SKUs) YTD 2Q15 in an effort to improve its merchandise mix.

Maintain NEUTRAL. We make no further changes to our forecast. Maintain NEUTRAL, with our TP unchanged at MYR1.36, based on 23xFY16F P/E. Our target P/E is in line with its regional listed peers’ 23xaverage. While the expansion bodes well, limited margins expansion may cap earnings growth. Risks include expenses outpacing revenue driven by new expansions and a further slowdown in consumer spending amidst macroeconomic headwinds.

2Q15 SSSG declines. 7-Eleven’s 2Q15 SSSG declined 7.3% YoY, bringing its 1H15 SSSG to -1.5%. Independent of the lower sales value due to the GST impact, however, SSSG would have been -1.5% and 0.5% for 2Q15 and 1H15 respectively. Apart from the GST impact, lower consumer confidence and the early timing of Ramadan in 2Q15 vis-à-vis FY14 also contributed to the decline in SSSG. These effects were slightly offset by a significantly higher average spending per customer YTD 2Q15 that increased 7.8%.

Going forward, the company’s margins are unlikely to fully recover as the GST-driven amendments to the Price Control Anti-Profiteering Act 2011 prohibit prices from being raised until Jun 2016 if they result in higher margins. Recall that margin compression in 2Q15 resulted in 1H15 earnings meeting only 33% of our and consensus estimates.

200 new stores pa expansion on track. 7-Eleven has launched 125 new stores and closed 16 stores, bringing its net store openings to 109 stores. We deem this on track, as the company aims a net addition of 200 stores in FY15. The new stores opened were mainly located in the Klang Valley.

In addition, its store refurbishment is also progressing well, with 102 stores being refurbished as at YTD 2Q15. 26 stores were refurbished to become the “next generation” stores, while 87 were transformed to become quick win food service (QWFS) stores. The former type offers a complete food service infrastructure while the latter is slightly moderate in terms of the same services. Management is optimistic in reaching its target of refurbishing 200 stores in FY15.

Other new initiatives and promotions. The convenience store has signed an agreement with BOXiT, which would see last mile delivery players use the parcel lockers available at 7-Eleven stores as their delivery points. Customers may find this appealing as it allows them to order items online and have them picked up at their preferred 7-Eleven store. The proposal is due to kick off in 4Q15 with 7-Eleven benefitting as a tenant and fee collector for each consignment. While earnings are accretive, it remains minimal at this juncture and we, therefore, leave earnings unchanged until further clarification is obtained from management.

Secondly, 231 new SKUs were launched YTD 2Q15 in the company’s continued effort to improve merchandise mix. The new SKUs launched are aimed at expanding the fresh food and beverage segment. This follows the introduction of 7-Eleven’s“own-brand” SKUs during the previous quarter.

Thirdly, 7-Eleven has signed up with Syabas over its water bill payment facility that is due to commence in 3Q15. It will complement the company’s existing bill payments services that includes Touch N’ Go top ups, which, according to management is “growing strongly”.

We believe that these new initiatives would not only channel higher commissionsrevenue to the company via its expanding in-store services, but also drive more traffic into its stores.