Kenanga downgrades 7-Eleven to market perform

KUALA LUMPUR: Kenanga Research has downgraded 7-Eleven Malaysia as its 1Q18 core net profit came in below expectations due to lower-than-expected sales and higher-than-expected operating expenses.

The research house said it downgraded the counter to market perform with a lower target price of RM1.55 from RM1.70 based on the revised FY19E price-multiple blended valuation.

It said 7-Eleven's 1Q18 revenue increased 3% due to the new sales contribution of 10 new stores while gross profit grew 7% as its margin expanded by 1.3ppt to 31.9% from 30.6%.

However, operating expenses allocation was higher at 35% de to new store expansion resulting in high rental cost, utility cost, store depreciation and maintenance expenses, which constrained margin expansion at the profit before tax level. 

"We cut FY18E and FY19E earnings by 16% and 14%, respectively, to take account the lower-than-expected sales and higher-than-expected operating expenses," said the research house.

Kenanga Research said 7-Eleven may lower its product prices following the zero-rated GST in June 1 to enable consumers to purchase in a larger volume. 

Other plans in the pipeline include a target of at about 150 new oputlets for FY18 and an overhaul in its stores operation and end-toend supply chain operators.