Seven & i: Department Store Divestiture Complete; Dedicating Resources To Reinforce C-Store Strength

We raise our fair value estimate of narrow-moat Seven & i to JPY 6,800 from JPY 6,300, after adjusting our foreign exchange assumptions and factoring in the impact of the department store divestiture, which completed on Sept. 1, 2023. Management raised full-year operating profit guidance by JPY 12 billion or 2.3%, but reduced net profit by JPY 55 billion or 19.3%, to reflect favorable currency movement, the strength of the domestic C-stores, and extraordinary losses concerning the divestiture. We foresee resources released from the divestiture will be used to accelerate C-store expansion and reinforce the firm's moat in fresh food and private label products. Meanwhile, the JPY 80 billion in proceeds, mostly from the borrowing repayment from the department store subsidiary, and more than JPY 20 billion tax savings, should be used for Seven & i’s debt repayment apart from dividend hikes. We view shares, trading at a 12% discount to our renewed intrinsic value, as undervalued. Gasoline margins and foreign exchange movement are the key swing factors to the near-term profits.