Increasing efficiency to offset rising costs
- We remain positive on Senheng’s outlook post-management meeting as sales demand is expected to be healthy and profit margins steady in 2Q22F.
- Its store expansion plan is on track — upgraded six existing outlets in 2Q22, with a target of 21 new/upgraded stores in FY22F to increase per store sales.
- Reiterate Add, with an unchanged TP of RM0.80 (17.4x CY23F P/E).
Sales momentum is expected to be healthy in 2Q22F
We gather that Senheng New Retail’s same-store sales growth (SSSG) across 99 of its 105 stores are expected to be positive, while the remaining six outlets could experience contraction in 2Q22 sales due to store closures for upgrading purposes. This ties in with our forecast of c.20% yoy growth in 2Q22F, premised on upbeat sales momentum in Apr/May 22 (partly driven by Raya festive sales and removal of movement restrictions, leading to higher consumer footfall, as well as the one-off RM500 voucher for electrical appliance purchases from the Malaysian Family Flood Relief Program) and a lower base in 2Q21. Note that we have estimated an SSSG of c.7% for Senheng in FY22F, on higher demand for its home appliances and audio products.
Expansion plan remains on track, mostly upgrading existing stores
Senheng is retaining its capex of c.RM160m for its store expansion plan over the next three years — to open 61 new/or upgraded stores by 2024F in the urban and sub-urban areas. This is in line with our FY22-24F capex outlay estimates of c.RM165m; we believe the expansion is a boon for its per store sales and its market position, which we have accounted for in our forecasts. That said, any stronger-than-expected SSSG from its upgraded stores poses an upside risk to our earnings forecasts. Senheng shared that it is also relocating some of its stores to more affluent areas/malls with higher footfall (i.e. one each in Kuchai Lama and Bangsar), which could bode well for future sales, in our view.
Focus on improving operational efficiency to offset rising costs
We expect 70% of Senheng’s c.2k-strong staff force (mostly floor staff and drivers) to be affected by the minimum wage hike of RM1,500 per month, effective 1 May 22, coupled with rising input costs, which could put upward pressure on its cost structure. However, Senheng intends to offset the rising costs by focusing on improving its internal cost efficiency and store productivity. Initiatives include enhancing productivity by having its trucks cover wider areas (i.e. more delivery orders fulfilled per truck) and increasing average transaction sizes per store through store enhancements, with better in-store designs and wider product selection. Hence, we expect margins to remain steady (Fig 7).
Reiterate Add, with an unchanged TP of RM0.80
With no major surprises, we retain our FY22-24F forecasts pending the release of its 2Q22 results on 26 Aug 22. Reiterate Add, with an unchanged TP of RM0.80 (17.4x CY23F P/E, a 20% discount to CGS-CIMB’s consumer discretionary sector’s 5-year mean P/E of 21.8x, to account for the competitive nature of the retail E&E sector). We like Senheng for its: i) leading position in consumer electronics, ii) backed by a loyal customer base of 3.37m PlusOne members, and iii) wider product offerings vs. peers.
