PETALING JAYA: A potential recovery in footfall and lower-than-expected operating expenses are expected to buoy Senheng New Retail Bhd
’s future earnings against its weaker prospects going forward, says CGS-CIMB Research.
The research house noted that the electrical and electronics retailer’s net profit of RM46mil for the nine-month period ended Sept 30, 2022 came in below its expectations at 62.2%, despite having gone up by 13.6% year-on-year (y-o-y).
However, Senheng’s gross profit margins for the nine-month period were up by 22.1%, underpinned by an improved sales mix.
“In our view, the earnings underperformance was mainly due to higher-than-expected operating costs in the third quarter of 2022 (3Q22), which led to operating expenditure (opex) as a percentage of revenue rising to its highest level since listing at 14.6% in 3Q22,” said CGS-CIMB Research in its latest report.
The ongoing store expansion plans are the main factor that contributed to the increase in the group’s operating costs, according to the research house.
For 3Q22, the group’s product sales were impacted by a drop in pent-up demand, the absence of festive sales and an overall seasonal slowdown in demand.
CGS-CIMB Research pointed out that revenue decreased by 11% quarter-on-quarter (q-o-q) amid weaker consumer affordability for big-ticket discretionary purchases.
“While gross profit margin improved to 23.1% on better sales mix, earnings before interest, taxes, depreciation, and amortisation margin declined to 8.5% as opex increased by 2.1% q-o-q with the launch of four new upgraded stores in the quarter.
“No dividend was declared in the quarter, as we expected,” said CGS-CIMB Research.
On this note, the research house said Senheng’s store expansion target for FY22 may not be met.
As of 3Q22, the group’s store count was 107. While the group has opened four more new stores in the quarter, making a total of 11 new stores in 9M22, the number still falls short of its target of 21 for FY22.
“We believe Senheng is slowing down its store expansion given the weakening operating environment.
“That said, the expansion slowdown could mean a more gradual pace in operating cost increases, while its ongoing efficiency projects could partially cushion any potential margin compression, in our view,” said CGS-CIMB Research.
The group’s margins could be further supported by its PlusOne membership, which is over 3.45 million, as this segment accounts for about 90% of total revenue.
CGS-CIMB Research has downgraded the stock to a “hold” with a lower target price of 62 sen at a price-to-earnings ratio of 15.2 times.
