Analysts see near-term labour headwinds for SEM
KUCHING: 7-Eleven Malaysia Holdings Bhd (SEM) will likely face near-term headwinds on issues pertaining to labour.
In a recent report, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) highlighted that there are possibly some headwinds ahead on issues pertaining to labour (minimum wage hike and foreign workers’ levy hike).
“Effective July 1, 2016, the monthly minimum wage will be raised to RM1,000 (from RM900; an increase of 11 per cent) for Peninsular Malaysia and to RM920 (from RM800; an increase of 15 per cent) for East Malaysia.
“SEM has about 12,000 staff currently. Assuming that 75 per cent are at about the current minimum wage, SEM could see additional costs of RM5.4 million for 6MFY16 and RM10.8m for 12MFY17.
“Ceteris paribus, this could negatively impact SEM earnings by up to nine per cent/16 per cent for FY16/FY17, respectively.
“However, since this is also an industry wide cost inflation issue, we expect SEM and its peers to eventually pass through the higher cost to end consumers through higher merchandise prices,” it said.
On a separate note, higher foreign workers’ levy (deferred for now) can also pose as another earnings risk.
However, the research team noted that the impact to SEM might be minimal as only about 10 per cent of its total staff force comprises foreign workers.
It also noted that SEM saw its same store sales growth (SSSG) of decline by 3.6 per cent in the financial year 2015 (FY15) on generally weaker consumer spending. For FY16, it said SEM’s management is looking at zero to two per cent SSSG.
Positively, Maybank IB Research believe that SEM’s unscathed expansion plan could benefit it in the medium term when consumer demand picks up.
“Store openings saw a ramp up in the fourth quarter of 2015 (an increase of 61 net stores), which brought total store count to 1,944 stores. Beyond 2016, management does not rule out the possibility of continuing with the expansion of 200 outlets per annum.
“Going forward, we understand that the strategy of geographical mix remains unchanged, with 30 to 35 per cent in Klang Valley and the balance in other parts of Malaysia,” it opined.
Overall, FY15 is the second consecutive year SEM has done a 100 per cent dividend payout ratio (DPR).
“While we maintain our assumption of 50 per cent, betterthan-expected payouts cannot be ruled out. We remain cautious on SEM’s near term earnings outlook given possibly slower consumer spending amid inflationary pressure,” it said.
On its 4Q15 results, Maybank IB Research noted that SEM said its moderate revenue growth was due to overall softer demand and weaker tobacco sales on excise duty led price hike (circa 23 to 26 per cent on a 40 per cent excise duty jump).
SEM’s SSSG for the quarter was – 5.5 per cent year-on-year while FY15 saw SSSG contraction of 3.6 per cent.
“We understand that there were no major shifts in product sales mix for FY15 (versus FY14),” the research team added.
All in, it pegged a ‘hold’ call on the stock.