ECOSHOP: Retailer Meets Expectations on Robust Margins; Strategic Expansion Fuels Future Prospects, Target Price Raised

Investment bank RHB has maintained a Neutral outlook on the retailer, downgrading its recommendation from “Buy” despite anticipating its first-quarter FY26 performance to meet expectations. The bank has, however, raised its target price to MYR1.63, up from MYR1.51, reflecting long-term growth potential from strategic initiatives. This new target price implies a 1% upside with an approximate 1% FY26F yield.

Performance Review

The company is expected to deliver a robust 1QFY26 performance, with core earnings estimated between MYR54-58 million. This aligns with forecasts and the typical seasonal pattern where the second half of the financial year sees stronger sales driven by festive seasons. A key factor in meeting expectations is the company’s strong Gross Profit Margin (GPM) performance, which has effectively mitigated an 8% dip in same-store sales growth (SSSG) observed in 4QFY25. The GPM expanded by 4.7 percentage points in 4QFY25, reflecting a half-quarter impact. However, the “Sama Bantu” sales campaign, which reverts F&B product prices to MYR2.40 starting July, might lead to a milder or muted GPM expansion in 1QFY26. The bank notes that the stock’s current valuation is considered fair following its recent rally, suggesting accumulation on share price weakness.

Strategic Expansion and Future Outlook

The retailer continues to benefit from the underpenetrated dollar store industry, capitalising on consumer downtrading trends that provide a substantial runway for expansion. Management has secured over 70 new locations for its store network and plans to refurbish approximately 20 older stores by year-end, introducing a refreshed concept and enhanced layout to boost sales productivity. Product innovation, particularly with attractive seasonal items, is also a key focus to stimulate customer spending. On the cost front, the impact of Sales & Service Tax and Employees Provident Fund contributions for foreign workers (starting October) is expected to be manageable due to the robust GPM expansion.

A significant opportunity lies in capturing the Sumbangan Asas Rahmah (SARA) cash assistance initiative under Budget 2026. With a higher budget allocation and rising traction for the program, the company is committed to developing this channel to enhance brand visibility and complement its network expansion. As of 4QFY25, 159 Eco-Shop outlets were SARA-activated, with plans for more to be added. RHB anticipates that more significant contributions from SARA will raise FY27-28F earnings by 4% per annum. This leads to the revised DCF-derived target price of MYR1.63, inclusive of a 4% ESG premium, implying a 33x 2026F P/E, which is at a discount to larger-cap peers.

Risks

Key risks to the recommendation include reputational issues and potential major delays in expansion plans.