UPEC Earnings: Broadly in Line; Group Profit Margin To Be Lowered by Carrefour Taiwan

June-quarter results for no-moat Uni-President Enterprises 1216, or UPEC, were mostly consistent with our expectations for revenue and operating profit. Sequential improvement in operating margin to 5.7% from 5.2%, in line with our projection, was driven by the food and beverage business in mainland China, whereas retail and convenience store, or CVS, franchises in Taiwan and the Philippines were drivers of top-line growth. UPEC completed the acquisition of an additional 49.5% stake, to a total of 70%, in Carrefour Taiwan during the quarter. We update our medium-term forecasts for UPEC and project the hypermarket business to add 2% and 1% to revenue and net profit CAGR, respectively, through 2027. We note however, the lower margin of Carrefour Taiwan versus its existing retail portfolio. The acquisition generated a noncash fair value gain of TWD 10.9 billion for the quarter. We maintain our fair value estimate at TWD 68 per share, which implies 17 times 2023 price/earnings, 6 times EV/EBITDA, and 4.7% dividend yield. The earnings multiple is roughly consistent with the three-year average of 18 times. The share price looks moderately overvalued to us.

Sales grew 5.3% year over year in the second quarter, driven by food, retail, and CVS businesses. Retail segment operating profit margin also increased versus the first quarter as Starbucks in Taiwan and 7-Eleven in the Philippines benefited from operating leverage. We expect UPEC to cycle the high revenue base in the third quarter, but operating margin should improve year on year thanks to Uni-President China and the retail businesses. Outside of the consolidation of Carrefour Taiwan, we make little change to our assumptions and earnings forecasts.