CIMB Research retains Reduce for 7-Eleven, still expensive

KUALA LUMPUR: CIMB Equities Research is retaining its Reduce call for convenience store operator 7-Eleven as is trading at an expensive price-to-earnings (P/E) against its compounded annual growth rate (CAGR).

The research house said on Friday that 7-Eleven’s FY17/18F P/Es of 38 times/34 times appear expensive against its modest FY17-19F earnings per share (EPS) CAGR of 4%.

“We retain our Reduce call with a target price of RM1, pegged to 24 times FY18 P/E (in line with regional peer average). Upside risks include faster-than-expected execution of its cost savings programme,” it said.

On Thursday, CIMB Research attended 7-Eleven’s 2Q17 analyst briefing along with 10 sell-side analysts. It was chaired by the group’s newly-appointed CEO Ho Meng and deputy CEO Hishamuddin Hassan. 

The briefing bore no major surprises and mainly discussed the company’s 2Q17 results as well as the progress of its “Back to Basics” programme.  

To recap, 7-Eleven’s 2Q17 sales increased 9.8% year-on-year but core net profit fell 33% year-on-year to RM10.2mil. 

During the briefing, management shared that the profit decline was further aggravated by the higher-than-normal inventory write-downs (a usual industry practice known as shrinkages) as it removed non-contributing inventories from its stores. 

The group expects this to normalise and even out in the next few quarters. 
More notably, the group reported its first positive same-store-sales growth (SSSG) of +2.4% year-on-year after eight consecutive quarters of negative growth which brought its cumulative SSSG to -2% year-on-year. 

This was attributed to higher volume growth for its F&B and general merchandises products as well as the boost from the Hari Raya festivities. 

Its 1H17 cigarette sales contribution declined 2 percentage point to 37% (vs. 39%). In addition, average ticket spend per customer for 2Q17 was healthy and saw an uptick of 2.6% year-on-year.  

“Management remains optimistic on its new ‘Back to Basics’ programme and targets to have its combined distribution centre (CDC) break-even by end-2017. 

“It plans to bring down its overall end-to-end supply chain operating costs, particularly for its warehousing, staff and transportation overheads to achieve cost efficiencies while aiming to increase its CDC charges and allowances to its suppliers. It aims to be the lowest cost operator in the industry,” it said.  

CIMB Research said 7-eleven’s management will tighten its promotional campaigns and continuously work with suppliers to maintain its margins as it makes a conscious effort to protect profitability.

It will maintain its store expansion programme at 150 stores per annum in 2018.

“Our earnings estimates are intact. While we commend management’s efforts in tightening costs and boosting efficiency, we advocate investors wait and see how well the new strategy is executed,” it said.
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