PCSC Earnings: Beats Estimates, With Retail Boosting Growth in 2023; Raising Fair Value to TWD 274

Narrow-moat President Chain Store Corp.’s 2912 first-quarter results beat our estimates, as all major business segments recorded resilient sales growth and product mix improvement. We’ve raised our forecasts for 2023 revenue and net profit as well as five-year contributions from the 7-Eleven business in the Philippines. This lifts our fair value estimate to TWD 274 per share (from TWD 263), which implies 27 times 2023 price/earnings, broadly in line with the five-year average. The Philippines segment is set to add 30 basis points to the five-year net profit CAGR of 5.6%, but we think the current share price has already reflected this new growth driver. As a result, we still see PCSC’s shares as moderately overvalued.

We expect 2023 net margin to grow 20 basis points year on year to 3.4%, driven by a higher mix of Starbucks in Taiwan and margin expansion in the retail businesses. Overall margins could be even better, but we think operating costs remain stubbornly high. We now expect 2023 revenue and net profit to grow 7.3% and 12.6% year on year, respectively, with the bottom line also getting a bump from the absence of exceptional charges in 2023. Over the midterm, the 30-basis-point upward revision in our forecast five-year net profit CAGR for 7-Eleven in the Philippines leads to a 4% increase in our fair value estimate.

PCSC’s first-quarter revenue grew 11.5% year on year, supported by 7-Eleven in Taiwan and the Philippines as well as Starbucks in Taiwan. Fresh food, city café, and beverages delivered double-digit sales growth for 7-Eleven in Taiwan as foot traffic continues to recover after the pandemic. The Starbucks business, which commands higher gross margin, also recorded 10% revenue growth. As a result, PCSC’s gross margin rose by 40 basis points to 34.2% during the quarter, with the improved operating leverage and product mix helping to more than offset rising input and operating costs.