KUALA LUMPUR: CGS-CIMB Research is positive on 7-Eleven Malaysia Holdings Bhd's (SEM) plan to open 100 new convenience store (CVS) stores in FY23, especially in suburban areas, focusing on its 7-café format.
"We believe this would bode well for its gross profit (GP) margin given the higher sales contribution from higher-margin, fresh food and beverage items.
"Also, we gather that SEM has garnered 600,000 users for its My7E loyalty mobile app since Aug 2022.
"This could help drive sales as it ramps up its marketing campaigns in FY23. SEM also plans to open 35 new Caring pharmacy stores in FY23," the research firm said in a note today.
Touching on earnings, CGS-CIMB Research said SEM, in its fourth quarter (Q4) FY22 results briefing, clarified that the steep drop in its CVS Q4 FY22 core profit was mainly due to a one-off impact of RM11 million for the provision of store maintenance, which was about RM5 million, store restoration (RM4 million), and user acquisition for its My7E loyalty programme mobile app (RM2 million).
This led to a 46.8 per cent year-on-year (YoY) surge in its CVS Q4 FY22 operating expenses. However, SEM expects CVS opex to normalise from the first quarter (Q1) FY23 onwards.
Excluding the RM11 million one-off impact in Q4 FY22 and the combined one-off rental rebate and wage subsidy of RM7.8 million in Q4 of 2021, SEM's Q4 2022 core net profit dropped by a lesser quantum of -28 per cent YoY, bringing FY22 core net profit to RM98 million, within CGS-CIMB Research's expectations but above Bloomberg consensus.
CGs-CIMB Research said that for FY23, SEM expects to feel the full-year impact of a higher minimum wage of RM1.500 per month effective May 1 2022, which will cost an additional RM2 million-RM3 million per month).
The other impact will also be from the Employment Act 2022 (effective January 1 2023), which reduced the permissible maximum weekly working hours from 48 to 45, and widened the eligibility for overtime payments to employees with wages up to RM4,000 per month from RM2,000 per month previously, which will cause RM250,000 per month hike in expenses for SME, and the higher operating hours with 1,525 CVS stores operating 24 hours, and 580 outlets operating 18 hours as of March 6, 2023.
"These, coupled with cost inflation which could increase its expansion costs, such as higher rental and renovation costs, could lead to near-term cost escalation, putting pressure on operating margins.
"However, we note that SEM is currently optimising its workforce's working shifts to minimise the resulting cost impacts," the research firm noted.
CGS-CIMB Research made no changes to its FY23-35 earnings per share (EPS) estimates, as there were no major surprises.
"Target price for SEM raised to RM2.10 to account for the improving fundamentals with the solid expansion of its CVS segment, and Caring Pharmacy is seeing margin recovery.
"Maintain Hold, as we believe current valuations have already accounted for its earnings trajectory," CGS-CIMB Research said.