PCSC’s Q4 Profit Missed Estimates, 2023 Margin Outlook Weakened; Retain TWD 263 FVE

Narrow-moat President Chain Store Corporation, or PCSC, reported fourth-quarter results that fell short of our estimates and Refinitiv consensus on the bottom line, despite exceeding our expectations on revenue. An increase in selling expenses was a major drag on operating and net profit. We expect inflationary pressure to continue weighing on various segments of PCSC this year, and that gross margin improvement would primarily be driven by a higher revenue mix of Starbucks Taiwan and Philippines' 7-Eleven. We do not expect margin for 7-Eleven Taiwan to expand, however. We also project a moderation in top-line growth in 2023 following the sharp rebound last year. Over the medium term, we project net margin to remain broadly stable as we do not anticipate material margin expansion drivers, while selling expenses should stay at the current level as PCSC invests to fend off competition. We maintain our fair value estimate at TWD 263 per share, which implies 28 times 2023 forward P/E, 7 times EV/EBITDA and 3.5% dividend yield. We think the stock is fairly valued and do not see near-term catalysts.