KUALA LUMPUR (March 22): 7-Eleven Malaysia Holdings Bhd (SEM) is expected to face operating margin pressure given the higher operating expenses. 

In a note on Tuesday (March 21), CGS-CIMB said it expects the convenience store operator to continue bracing for the higher cost impact, partly from the full-year impact of a higher minimum wage of RM1,500, which has been implemented since May 1, 2022.

The higher cost impact also comes from the Employment Act 2022, effective from Jan 1, 2023, which reduced the permissible maximum weekly working hours to 45 hours from 48 hours, and widened the eligibility of overtime payment to employees, with wages up to RM4,000 per month from RM2,000 per month previously, resulting in an estimated RM250,000 hike in expenses per month.

SEM's cost is also on the rise due to longer operating hours, with 1,525 convenience stores (61% of its total store count) operating 24 hours a day, and 580 outlets (23%) operating 18 hours as of March 6, 2023.

“These, coupled with cost inflation, which could increase its expansion cost (for example, higher rental cost and renovation cost), could lead to near-term cost escalation, putting pressure on operating margins,” said CGS-CIMB.

To mitigate the rising operating cost, the research house noted that SEM is currently optimising its workforce’s working shifts to minimise the resulting cost impact.

Meanwhile, the research outfit is positive about SEM’s store expansion plan to drive growth.

According to SEM, the group plans to open 100 new convenience stores in the financial year ending Dec 31, 2023 (FY2023), especially in suburban areas, focusing on the 7 Café format.

CGS-CIMB believes this would bode well for the group’s gross profit margin, given the higher sales contributions from higher-margin fresh food and beverage items.

It noted that SEM’s gross profit margin rose 1.5% year-on-year (y-o-y) to 32.2% in FY2022, due to the opening of 88 new 7 Café stores.

“Also, we gather that SEM has garnered 600,000 users for its My7E loyalty mobile app since August 2022. This could help drive sales, as it ramps up its marketing campaigns in FY2023,” the research house added.  

Apart from convenience stores, SEM also plans to open 35 new Caring pharmacy stores (+16% y-o-y) in FY2023.

Overall, CGS-CIMB made no changes to its FY2023-2025 earnings per share estimates, as there were no major surprises from SEM.

To recap, SEM saw its net profit shrink 91% to RM2.65 million for the fourth quarter ended Dec 31, 2022 (4QFY2022), from RM29.44 million a year earlier, dragged by higher operating expenses amid higher store operation-related expenses, followed by longer operating hours and the minimum wage effect, as well as an increase in store maintenance activities.

The lower profit was also due to the group's recognised corporate expenses of RM11.6 million in 4QFY2022, primarily consisting of finance costs for the acquisition of Caring Group.

The sharp fall in net profit was despite a 24.82% growth in revenue to RM992.42 million from RM795.06 million for 4QFY2021, driven by revenue contributions from the group's pharmaceutical and convenience stores segments.

Nonetheless, SEM posted higher annual net profit, as it grew to RM68.63 million for FY2022 from RM44.35 million for FY2021, as revenue increased to RM3.76 billion from RM2.81 billion during the same period. 

The research firm revised its target price for SEM to RM2.10, from RM1.72 previously, on improving fundamentals, solid expansion of its convenience store segment, and that Caring is seeing margin recovery.

But CGS-CIMB retained its “hold” recommendation for SEM, as it believes current valuations have already accounted for SEM's earnings trajectory.

At the noon break on Wednesday, SEM had risen one sen or 0.49% to RM2.05 a share, giving the group a market capitalisation of RM2.53 billion.  

Since the beginning of this year, the stock has gained 15.8% from RM1.77.

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Higher operating expenses drag 7-Eleven’s 4Q earnings down by 91%