DB Securities said BGF Retail(282330) is expected to continue improving earnings on the back of a recovery in the convenience store industry and stronger store competitiveness. It maintained a "buy" rating and raised the target price to 180,000 won from 170,000 won. BGF Retail's previous trading day closing price was 133,500 won.
Researcher Heo Jena at DB Securities said in a report on the 7th, "As operating conditions in the convenience store industry improve, strengthened fundamental competitiveness is shining," and added, "We recommend increasing exposure as this is the time when an industry recovery and earnings improvement are taking hold."
BGF Retail's second-quarter consolidated operating profit was 84.9 billion won, up 22.3% from a year earlier. That beat the market consensus of 74.0 billion won. Despite costs related to a logistics strike being reflected in both operating profit and non-operating gains and losses, it delivered solid results.
Existing stores continued to grow. Same-store sales growth rate in the second quarter came in at 4.2%. Favorable weather, high-oil-price subsidies, and the spread of foreign tourist demand to regional commercial districts had an impact. The number of customers rose 3%, and average ticket size increased 1.2%.
Changes in product mix also contributed to better profitability. The sales share of processed foods and foods rose by 0.9 percentage point and 0.4 percentage point, respectively, while the share of cigarettes, which are relatively less profitable, fell by 1.2 percentage points. Accordingly, the gross margin improved by 0.4 percentage point from a year earlier.
DB Securities expects the decline in the number of convenience stores to have run its course and the industry's growth rate to rebound starting this year. As BGF Retail has focused on opening profitable stores and pruning inefficient outlets through last year, it is well positioned to quickly capture demand as the industry recovers.
The number of specialized stores with strengthened differentiated products is also set to increase to 500 by year-end. The spread of convenience store food consumption centered on foreign tourists is also positive. The foreigner sales share is currently estimated at about 3%, and purchases are centered on general merchandise, which is expected to help improve profitability.
Heo said, "Same-store growth in July was somewhat weak, but considering the base effect from last year's consumer coupons, monthly growth will rise thereafter," adding, "We expect the pace of earnings improvement to accelerate toward the second half."
BGF Retail's stock is at about 9 times 12-month forward price-earnings ratio (PER). DB Securities said the current share price is excessively undervalued given expectations for a full-fledged industry recovery and profit improvement.