Analyst Note| Jeanie Chen |
Narrow-moat Seven & i beat its interim profit targets as expected but second-quarter profits somewhat, fell short of our expectations due to weakness in the moaty domestic c-stores business (SEJ). In contrast, the U.S. c-store business (SEI), the key profit driver in our long-term growth assumption, continued to record robust growth thanks to double-digit same-store sales growth and a pickup in gasoline demand. While our second-half estimate of operating profits is more than 5% above implied guidance, we think it is highly achievable under the condition that the coronavirus situation does not worsen in winter. We have marginally adjusted net profit forecasts to reflect changes in extraordinary items and tax rates, which leaves an immaterial impact on our fair value estimate of JPY 5,400. We view shares as modestly undervalued, trading at 11% discount to our fair value estimate. The strengths spotted in SEI reinforces our investment thesis that untapped food service growth of the U.S. c-store business will serve as a growth engine for the group’s long-term profit expansion.