ZEN - 3Q24: SSS still weak

ZEN reported a 3Q24 net profit of Bt23mn, plummeting 43% YoY on poor SSS and EBIT margin but surging QoQ off the low 2Q24 base of Bt0.6mn plus lower SG&A expense. While we like ZEN’s efforts at controlling costs, we are cautious on revenue in view of low consumer spending and competition in the restaurant industry. Catalysts will be better consumer purchasing power and stronger operations on fruition of its efforts to boost SSS and margin. We stay Neutral with a new end-2025 DCF TP of Bt8/share.

3Q24: Another YoY earnings drop. ZEN reported a 3Q24 net profit of Bt23mn, sinking 43% YoY on low SSS and EBIT margin but surging QoQ off the low base of Bt0.6mn in 2Q24 and lower SG&A expense.

Highlights:

Restaurants (accounting for 77% of revenue): SSS was -13% (vs. -4.5% in 3Q23 and -14.8% in 2Q24), reflecting continued low consumer spending and intense competition. ZEN is being cautious and added no owned outlets in 3Q24, but four new franchise outlets were added.
Retail merchandising (18% of revenue): Revenue grew 21% YoY but was flat QoQ. In its seasoning business, ZEN increased OEM products and distributors and in the frozen seafood business, it added new product items to expand its customer base.
EBIT margin was 4.7% in 3Q24, slashed from 5.7% in 3Q23, pressured by poor SSS. However, EBIT margin improved QoQ from 1.6% in 2Q24 on an 8% QoQ reduction in SG&A expense in response to its cost control program.

Earnings revision. To factor in its control over costs, we raise our 2024 core earnings forecast by 43%, but the upgrade is small at 5% in 2025. We maintain our cautious view on revenue in view of low consumer spending and competition in the restaurant industry. Catalysts will be better purchasing power and stronger operations on fruition of its efforts to boost SSS and margin by store revamping and building brand recognition. We maintain our Neutral rating on ZEN with a new end-2025 DCF TP of Bt8/share (up from end-2024 DCF Bt6.8/share after rolling valuation to 2025), based on WACC at 7.4% and long-term growth of 2%.

Risks. 1) Economic slowdown impacting consumer spending, 2) intense competition, 3) rising costs and 4) change in consumer preferences. We see ESG risk as consumer safety and food quality (S).