Maybank Investment Bank Berhad
May 29, 2025

7-Eleven Malaysia: Earnings Miss Expectations as Cost Pressures Mount – Full Analysis and Outlook

Overview: Challenging Outlook for 7-Eleven Malaysia in FY25

7-Eleven Malaysia Holdings Berhad (SEM) has started FY25 on a disappointing note, falling short of both its own and the market’s expectations. Despite robust revenue growth, surging operating and interest expenses have weighed heavily on profitability. The company’s ambitious expansion of its 7-Café format may enhance margins in the long run, but in the short term, these efforts are being outpaced by rising costs. Below, we provide a comprehensive breakdown of SEM’s performance, strategy, and financial outlook, as well as a detailed look at key risks and valuation metrics.

1Q25 Results: Profitability Undermined by Higher Costs

• Net Profit Misses Target: For 1Q25, SEM recorded a net profit of MYR11 million, down 17% year-on-year. This achievement represented only 17% of Maybank’s and 16% of consensus full-year earnings estimates, signaling a significant shortfall.
• Revenue on Track: Revenue for the quarter reached MYR755 million, a 10% increase YoY and 1% QoQ, in line with expectations and accounting for 25% of the FY25 revenue estimate.
• Same-Store Sales Growth (SSSG): SSSG came in at a healthy +7.1% YoY, driven by increased customer count and higher average daily sales per store, as well as contributions from 65 new stores opened over the past year.
• Margin Erosion: Despite revenue gains, pre-tax profit dropped by 32% YoY due to:
  • Higher selling and distribution costs (+12% YoY), mainly from headcount increases and a mandatory minimum wage hike effective February 2025.
  • Increased interest expenses (+4% YoY).
• Tax Relief: A lower effective tax rate of 18% (compared to 33% in 1Q24) softened the net profit decline.
• Store Network Expansion: As of March 2025, SEM operated 2,646 stores (+65 YoY, +11 QoQ), including 592 7-Café outlets.

Strategic Focus: Expansion of 7-Café Format

SEM is doubling down on its 7-Café store expansion strategy, aiming to position itself as a fresh food destination—a segment estimated to contribute around 14% to group sales. While this move targets higher-margin sales, the associated increase in store operating expenses is likely to outpace sales growth in the near term. This presents a challenge as SEM attempts to reposition its brand and stores in the minds of consumers.

Downward Revision in Earnings Estimates

Following the weak 1Q25 showing, earnings estimates for FY25E, FY26E, and FY27E have been revised downward by 14%, 6%, and 4% respectively. The revised projections reflect ongoing cost pressures and the lag in profitability improvement from the 7-Café rollout.

Valuation and Recommendation

• Target Price: The 12-month target price is maintained at MYR1.60, representing an 18% downside from the current share price of MYR1.97.
• Valuation Method: The target price is based on 28x forward PER (-0.5 standard deviation to mean), with the valuation period rolled forward to FY26E.
• Rating: Maintain SELL.

Comprehensive Financial Review

Key Financial and Operational Metrics

• Gross Profit Margin: 30.7% (1Q25), relatively stable YoY.
• Operating Margin: 3.9% (1Q25), down from 5.1% in 1Q24.
• Pretax Margin: 1.6% (1Q25), down from 2.6% in 1Q24.
• Net Profit Margin: 1.4% (1Q25), down from 1.9% in 1Q24.
• Tax Rate: 17.9% (1Q25), significantly lower YoY.

Balance Sheet Highlights

• Total Assets (FY24A): MYR2,456m
• Cash & Short Term Investments (FY24A): MYR217.9m
• Inventory (FY24A): MYR420m
• Property, Plant & Equipment (FY24A): MYR568.3m
• Total Liabilities (FY24A): MYR2,113.6m
• Shareholders Equity (FY24A): MYR344.5m

Cash Flow and Capital Expenditure

• Operating Cash Flow (FY24A): MYR82.3m
• Capex (FY24A): MYR229.9m
• Free Cash Flow (FY24A): -MYR147.6m
• Dividends Paid (FY24A): MYR29.9m

Key Ratios and Efficiency Metrics

• Revenue Growth (FY24A): 5.1%
• EBITDA Margin (FY24A): 11.9%
• Current Ratio (FY24A): 0.9x
• Net Gearing (FY24A): 101.5%
• Debt/EBITDA (FY24A): 1.6x
• Capex/Revenue (FY24A): 7.9%

Price Performance and Shareholder Structure

• Current Share Price: MYR1.97
• 52-Week High/Low: MYR2.02 / MYR1.83
• Market Capitalisation: MYR2.5 billion (USD596 million)
• Issued Shares: 1,278 million
• Free Float: 22.8%
• Major Shareholders:
  • TSAI HONG TU – 17.0%
  • TAN CHEE YIOUN – 5.1%
  • Berjaya Land Bhd.

Investment Risks and Challenges

• Regulatory Exposure: Around 30-35% of SEM’s revenue comes from tobacco sales, making it highly susceptible to regulatory shocks such as excise tax increases.
• Labor Cost Pressure: Rising minimum wages and headcount expansion directly impact operating expenses.
• Execution Risk: Aggressive store expansion could lead to higher-than-expected costs, especially as fresh food repositioning initiatives are rolled out.

Historical Rating and Target Price Trend

The rating history for SEM has seen several adjustments over the past two years, moving from BUY to HOLD, and more recently, to SELL, reflecting increasing caution as cost pressures and margin headwinds mount.

Conclusion: Maintain Caution Amid Rising Costs

SEM’s strategy to grow its higher-margin 7-Café business is promising, but execution risks and near-term cost pressures are likely to continue weighing on earnings. The stock remains under a SELL recommendation with a MYR1.60 target price, based on the expectation that profitability improvements will take time to materialize. Investors should monitor regulatory developments, wage trends, and the pace of store expansion closely as these factors will be critical to SEM’s earnings trajectory in the coming years.