ZEN report a poor net profit of Bt0.6mn in 2Q24, sinking 99% YoY and 96% QoQ, far below our estimate of Bt6mn due to weak SSS and EBIT margin. This is its worst showing since 2017 ex-pandemic in 2020-21. Although share price has already fallen 24% over the past three months, we expect to see price continue to fall, driven down by earnings downgrades and lack of near-term catalysts. We rate Neutral with a new end-2024 DCF TP of Bt6.8/share (down from Bt7.5/share).
2Q24: Below estimates on weak SSS and EBIT margin. ZEN report a poor 2Q24 net profit of Bt0.6mn, sinking 99% YoY and 96% QoQ, far below our estimate of Bt6mn on weak same-store-sales (SSS) and EBIT margin. This is its worst showing since 2017, excluding the COVID-19 pandemic in 2020-21.
Highlights; · (-) Excluding the pandemic years in 2020-21, SSS was the worst since 2017, with restaurants (accounting for 80% of revenue) reporting SSS of -14.8% (vs. +3.1% in 2Q23 and -7.8% in 1Q24), reflecting slow consumer spending and intense competition. We believe the main drag on SSS was poor operations at AKA Yakiniku (a grill restaurant, 35% of restaurant revenue). ZEN is being cautious and added no outlets in 2Q24, either owned or franchise. · (+) Retail merchandising revenue (18% of revenue) grew 46% YoY and 12% QoQ in tandem with more customers. · (-) EBIT margin was 1.6% in 2Q24, slashed from 7.4% in 2Q23 and 3.8% in 1Q24 by a rise in SG&A expense related to newly-opened owned outlets since 2H23 plus lower revenue against fixed cost for key components such as rental expense and staff cost.
Earnings cut. We cut our 2024F core earnings forecast by 57% and 2025F by 30%. We expect earnings to continue to fall YoY in 2H24, bringing a 71% contraction of core earnings to Bt46mn in 2024.
Lack of near-term catalysts. Although ZEN’s share price has fallen 24% over the past three months, far worse than the SET’s fall of 5%, we expect share price to continue to be pressured down by the earnings downgrades brought by the poor 2Q24 plus concerns on low consumer spending and competition in the restaurant industry that will eat into profitability and earnings. 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 new end-2024 DCF TP of Bt6.8/share (down from Bt7.5/share), based on WACC at 7.5% 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).
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