Initiating at EW on Seven & i Holdings and Aeon:
Food now generates 60% of general merchandise store
(GMS) sales, ranking GMS alongside convenience
stores (CVS) as defensive stocks. These tend to
outperform TOPIX during economic downturns and to
underperform in recoveries. Our macro team expects
both GDP growth and IP to turn up from a trough in
Jan-Mar 2009, and as expectations for economic
recovery come to the fore, we assume GMS stocks will
underperform the market.
PTs: We peg these to retailer EV/EBITDA averages in
Japan, but also conduct intrinsic value analysis and
cross check downside with P/B. Our PTs are ¥2,550 for
Seven & i (5.7x EV/EBITDA, 1.24x P/B) and ¥950 for
Aeon (7x, 0.9x).
Share price trading ranges – Seven & i: We envisage
the floor (Bear case) at ¥2,100 or 1x BPS, and ceiling
(Bull case) at ¥3,000, in line with intrinsic value. Aeon:
We see the floor at ¥740 (Bear case), in line with intrinsic
value, and the ceiling (Bull case) at ¥1,100, 1x BPS.
Investment themes: (1) Response to graying of the
population, (2) shift from suburban shopping centers to
city center retailers, (3) private brand (PB) strategies. In
each case, we think efficiency rather than scale needs to
be pursued. Seven & i has an advantage here, with the
industry’s top share in convenience store business, a
high-margin format offering easy customer access.
Future catalysts: GPM improvement and restructuring
progress at 1H results reporting. We are not anticipating
marked GPM improvement currently, as unit prices are
down but volumes have not yet picked up to
compensate. If specific measures to restructure the
GMS business are laid out (closing unprofitable stores,
more efficient use of sales space), however, we believe
upside share price potential would increase.