CGS International’s (CGS) Company Note today (Mar 26) said they updated their forecasts for 7-Eleven post the announcement of its 4Q23 results and the completion of the disposal of Caring Pharmacy.
CGS has cut FY24F and FY25F core net profit estimates by 28.5% and 19.0%, respectively.
While our FY24-25F revenue estimates are reduced by 26.4-27.4% to adjust for the absence of Caring’s revenue, they lifted their revenue estimates for 7-Eleven’s convenience store segment by 8.3% and 7.5% for FY24F and FY25F, respectively.
This is reflective of CGS’s overall constructive view on private consumption trends in 2024F.
With the focus on converting existing stores into 7-Cafés on the east coast of Malaysia as well as the completion of its Fresh Food Commissary, revenue growth and reduced costs of sales should bring gross margins back to all-time highs of 32%.
Post the disposal of Caring Pharmacy, 7- Eleven’s balance sheet seems under geared and CGS believes this could pressure ROEs.
As management has committed to an aggressive RM300m capex plan and paring down debt of RM200m, CGS estimates ROE could decline to 17.2% in FY24F from 30.7% in FY23.
Management has not indicated any return of excess cash to shareholders to support ROEs.
Consumption and tourism growth to boost convenience stores
CGS believes improved policy direction by the government should be positive for economic growth in 2024F, with CGSI Research’s Economics team forecasting 2024F real GDP growth of 4.6% yoy and private consumption growth of 6.5%.
CGS also noted that increased cash handouts to lower income households, such as i) a higher maximum rate for Rahmah Cash Aid (STR) from RM3,100 to RM3,700 in 2024, and ii) one-off bonus to civil servants and pensioners together with cash transfers of an extra RM2bn, should support consumer spending.
A further recovery in tourist arrivals could lead to increased footfall and support demand for convenience store goods.
CGS reiterates Hold; growth prospects accounted for in rich valuations
CGS reiterates Hold as they think loss of earnings contribution arising from the Caring Pharmacy disposal is offset by improving convenience store prospects.
CGS changes their valuation methodology from P/E to GGM (pg 2) to better capture its medium-term growth trajectory, with a lower TP of RM1.98. At RM1.98, implied FY24F P/E of 32.4x is 1 s.d. above its nine-year mean since listing – adjusting for the pandemic period – which should limit share price upside.
Upside risks include higher-than-expected sales and margin expansion while downside risks expected are a spike in operating costs and lower-than-expected net store additions.
