In a better spot in FY22
Maintain BUY with unchanged TP of MYR1.80
SEM’s outlook is positive in FY22 given higher store traffic and average revenue per store, alongside easing movement restrictions. As consumers re-adjust to post-pandemic routines, dry and fresh food uptake at its stores will continue to increase, potentially leading to margin expansion. We make no changes to our earnings estimates. Our TP of MYR1.80 is based on 28x FY22E PER, -1SD to mean.
Improved product mix
During SEM’s results briefing, management shared that 4Q21 revenue growth of 34% YoY came from (i) positive SSSG (7-Eleven: +18.8%, Caring: +4.9%), while (ii) eased movement restrictions also saw customer count increased by 7% YoY. Further, expansion of gross profit margins in 4Q21 (+1.4 ppt YoY) was mainly due to lesser contribution from low margin tobacco sales at 36% (vs. 39% in 4Q20).
Store expansion targets to resume in FY22
Total store count stands at 2,427 (+14 stores YoY) convenience stores (CVS) and 191 pharmacy stores as at end-Dec 2021. In light of improved business conditions, SEM plans to open c.100 new CVS stores (7-Eleven stores: +50, 7-Café stores: +50) and c.20-25 new pharmacies under the Caring group. Its new 7-café concept store will spearhead SEM’s renewed focus on fresh food in order to lift margins and diversify away from its dependency on tobacco sales. With 8 7-café stores under its belt, we understand that average sales per store is c.1.5 to 3.5x higher than its CVS stores while fresh food contributes to a higher 28-32% of store revenue vs. SEM’s overall fresh food contribution of c.10% in 4Q21.
Demand-based extension of operating hours
At present, c.8% of SEM’s CVS stores have resumed their regular 24-hour operating hours. Throughout FY22, SEM will selectively transition certain stores back to full operating hours (24 hours) depending on the demand recovery in specific areas. We believe post-midnight sales have not recovered as quickly given that night entertainment outlets have not been allowed to reopen yet. Current industry labour shortages may also hinder its ability to fully revert to 24-hours operating hours, in our view.