7-ELEVEN MALAYSIA HOLDINGS BHD
Target price: RM1.34
ANALYSTS attended 7-Eleven’s third quarter review were not surprised by the results, with key discussions on how to improve margins through a better product mix.
Up to end-third quarter 2018, 7-Eleven had added 34 new stores and refurbished 113 existing stores.
“We gather that the slower pace of new store openings was due to logistics issues it faced in the first half of 2018.
“Moving forward, we understand that the company will take a more aggressive stance in opening new outlets, as all the logistics issues have been resolved since the beginning of the third quarter,” CGS-CIMB said.
The group will continue refurbishing existing stores in a bid to refresh its store appeal and to provide consumers with a better shopping experience.
7-Eleven also aims to grow sales from the fresh-food segment and plans to improve its product offerings through various initiatives by continuing to secure exclusive items for its outlets, such as “Pepsi Retro” and “Maggie pedas giler”.
The group is rationalising its units to prevent product overlap and to have sufficient space to offer a wider product range.
CGS-CIMB is positive on 7-Eleven’s plans to grow its fresh food sales (higher margins) through better collaboration with Café de Coral, which is mainly done through the development of more food produce and increased logistics reach beyond the current 400 outlets in the Klang Valley, Genting Highlands and Melaka.
“7-Eleven could possibly set up its own centralised kitchen or work with another partner with larger facilities,” it said.
CGS-CIMB has maintained its “hold” call with an unchanged forecast end-2019 target price of RM1.34. The target price is based on forecast calendar year 2020 target multiple price/earnings of 24 times, which is in line with the regional peer average.
“At this juncture, we believe that current valuations have priced in its improved prospects and ongoing long-term cost-saving initiatives,” it said.
Some upside/downside risks to the call would include faster/slower-than-expected recovery in domestic consumer spending and more/less effective rollout of its cost-saving programme.
By PublicInvest Research
Target price: RM4.34
ANALYSTS are positive on the progress of automation and digitalisation of Kossan’s glove manufacturing process after returning from visiting its model plant (Plant 16).
The model plant is equipped with automated and computerised systems, which help to reduce reliance on workers, improve efficiencies and productivity, and ensure stable production as well as quality consistency.
Plant 16 has an annual production capacity of up to 3 billion pieces of gloves annually with eight production lines, which account for around 11% of the group’s total capacity, mainly for the production of the patented Low Derma nitrile glove.
“While this would result in cost savings and hence improve the group’s margin, we reckon it would take some time for the group to fully implement the new systems at its existing plants,” PublicInvest said.
The computerised control room is equipped to enable digital monitoring of all the production lines.
Kossan plans to duplicate this system at its existing plants. In addition, the group also has a control room to automate latex mixing process, which further reduces its manpower from 12 to 15 workers previously to only five 5 workers currently.
PublicInvest said Kossan has developed its own in-house patented “capture type” of layering machines, which is more advanced than the older version of “roller type” of stripping machines, as the former is capable of counting exactly the number of pieces of gloves it strips off from the glove formers.
Apart from that, the group is in the midst of developing its in-house packaging machine, which is currently a manual process, with the aim to remove two third of the number of workers required for packaging, which is the most labour intensive area in the entire gloves production process.
As a result of the digitalisation and automation, the model plant has managed to reduce reliance on workers to 2.5 workers per million pieces of gloves as compared to 3 workers per million pieces of gloves in other existing plants (including all staff).
PublicInvest said the group aimed to further reduce the number to 1.2 workers per million pieces of gloves for the model plant once it automated its packaging process by next year.
Moving forward, the group’s performance is expected to be supported by Plant 18 (2.5 billion pieces annually), Plant 19 (3 billion pieces annually) and the expansion in Bidor (45 billion pieces annually).
The research house has maintained its earnings estimates and “neutral” view on the stock with an unchanged target price of RM4.34.
SP SETIA BHD
Fair value price: RM2.39
AMINVESTMENT expects S P Setia to register core net earnings of RM263.6mil, RM352.9mil and RM402.8mil for its financial year 2018 (FY18), FY19 and FY20, respectively.
At present, the company has numerous ongoing projects with a remaining land bank of 10,366 acres bearing a total gross development value (GDV) of RM186.2bil, giving it long-term earnings visibility.
S P Setia’s developments are mainly concentrated in the central region of Peninsular Malaysia, with 53% of the total undeveloped land bank and 55% of the total remaining GDV.
The group has also ventured into abroad such as Vietnam, Singapore, Australia, China, Japan and the UK. S P Setia has an effective undeveloped land bank of 309 acres with a remaining GDV of RM20.2bil.
As of the first nine months of FY18, S P Setia has launched projects with total GDV amounting to RM4.64bil while another RM1.6bil is planned for the remaining months of this year, bringing the total GDV to RM6.24bil for the year.
“Meanwhile, the company’s unbilled sales of RM7.92bil will be progressively recognised over FY19-FY21,” according to AmInvestment.
The brokerage said that in the short to medium term, the property market remained subdued with many potential buyers having difficulty in obtaining loans due to their already-high debt service ratios.
Meanwhile, a lack of overseas contributions and slow progress billings from local projects are the key factors for weaker earnings in 2018.
Moreover, management noted that there was no evident pick-up in sales during the month of October and conditions remain challenging.
“We expect net profit to improve by 34% to RM353.6mil in FY19, driven by higher sales due to stamp duty waiver, inventory clearing efforts and lower interest expenses as a result of repayment of borrowings from the sale of Battersea Phase 2 commercial assets.
“We expect FY20 earnings to grow to RM402.8mil with additional earnings recognition from Battersea Phase 2 residential in the end of FY20,” AmInvestment said.
The research house also expects net gearing to drop to about 20% in FY19 following the sale of Battersea Phase 2 commercial.
It said it has reinitiated “hold” coverage and the stock is valued at RM2.39 per share based on a conservative 45% discount to revised net asset value, implying forward price-earnings ratios of 32.1 times, 24 times and 21 times for FY18-FY20, respectively.
“Nonetheless, we believe the outlook for S P Setia shall remain stable premised on its strong unbilled sales of RM7.92bil and overseas contribution in 2020,” the brokerage said.
CYCLE AND CARRIAGE BINTANG BHD
By AffinHwang Capital
Target price: RM1.48
AFFINHWANG is negative on the disposal of Cycle and Carriage Bintang (CCB) where the group will cease to be the 49% shareholder in Mercedes-Benz Malaysia Sdn Bhd (MBM) as Daimler AG (DAG), which owns 51% in MBM, looks to acquire the remaining stake for RM66mil.
“It will strip off CCB’s recurring dividend income of RM11.2mil,” it said.
Consequently, CCB is obliged to sell its 49% stake in MBM to DAG.
The proceeds will be used for working capital and repayment of borrowings.
Following the disposal, CCB will no longer be entitled to the annual dividend income of RM11.2mil.
Post-disposal, CCB will remain as the leading Mercedes dealer with the largest network in Peninsular Malaysia.
“We think CCB’s profitability will continue to face headwinds from the intense competition from other Mercedes dealers and internally, the higher capital expenditure (building of Sungei Besi showroom) and operating expenditure (mainly staff costs, professional fees, marketing and promotional expenses),” analysts said.
However, the research house believes the recent shift towards higher margin mix (from lower margin cars) sparks hope for an uptick in margins.
Following the disposal, the brokerage has cut core its forecast earnings per share by 38%-57% over FY19-FY20 to reflect the absence of the annual dividend income.
In tandem with the earnings downgrade, AffinHwang has lowered its target price to RM1.48 from RM2, based on the estimated 0.5 times calendar year 2019 book value (from 0.3 times) due to the challenging outlook.
The upside risks include stronger-than-expected sales and profit margins.