JUNE 7 — 7-Eleven Malaysia Holdings Bhd rose to a high of RM 1.55 and closed at RM 1.53 on its re-listing last Friday, against expectations for a decline from its offer price of RM1.38 a share.
Malaysia’s 10th-richest person, Vincent Tan, relisted the convenience store chain for a third time, after he privatised it in 2011.
The IPO had been oversubscribed 4.8 times.
The company was planning to list last December but was delayed until March after the regulator raised queries about valuations, according to the Malay Mail.
The IPO revolves around its expansion plans by increasing the number of stores it operate but it's hard to figure out the continuity of expansion as the business may come to a saturation point if it does not think beyond Malaysia.
TA securities has given target price RM1.24 to 7-Eleven Malaysia.
It expects the group's capital expenditure to rise more than RM300 million in the next three years as it will add another 600 stores, which is almost 60 per cent more than during the same historical period.
The amount is more than double that reported in the past three years of RM125 million.
It also highlights that softer spending due to various subsidy cuts and GST implementation next year could pose other threats in the near term.
Background
7-Eleven Malaysia is the largest convenience store operator in Malaysia with 1,583 stores and a market share of 82 per cent.
It is a part of the Berjaya group which is owned by Vincent Tan.
7-Eleven was initially privatised in 2007 at a price of RM2.10 which was a 10.53 per cent premium over the five-day weighted average market price at that time.
Three years later he listed the company as a unit of Berjaya Retail, but it was delisted within nine months because it lacked public interest and trading liquidity.
The reason for relisting could be due to rerating of the retail sector that has enhanced the price-to-earnings ratio from 26.1x to 219.7x since the time the group was delisted.
Financials
The company has disclosed these results for the most recent financial year:
Revenue: +5.9 per cent to RM1.7 billion
Profit: +27.9 per cent to RM51.8 million
Cash flow from operations: RM186.9 million vs RM66.7 million
Dividend: RM117.5 million vs Nil
7-Eleven Malaysia sells tobacco, food and beverages, non-food and media.
Commission income on mobile phone and online gaming reloads make up 3 per cent to 4 per cent of revenue. These products earn 100 per cent gross margins.
Going forward, it will expand in-store services with MOL, an online payment service provider.
Food and beverages contribute about half of the revenue and tobacco contributes about 35 per cent of revenue.
The growth in revenue was mainly driven by an increase in the number of stores from 1,212 in FY10 to 1,557 in FY13.
They now have 1,583 stores operating in Malaysia.
However, same-store sales fell.
This growth measures revenue growth in its existing stores as opposed to new stores.
The growth was 3.4 per cent in FY10, 2.2 per cent in FY11, 1.6 per cent in FY12 and it fell into the negative territory to 0.1 per cent in FY13.
This was due to 71 stores closed for renovation (Page 222 of the prospectus) and economic factors that slowed Malaysian consumer spending.
Excluding these 71 stores, its same-store sales growth in FY13 would have been 1.1 per cent.
Same-store sales growth should ideally increase its revenue while maintaining a steady fixed-cost, such as staff, rental, utilities and distribution expenses, thereby increasing its operating margins.
1. Can same-store revenue grow if it continues to renovate its stores?
The group has also provided information such as sales per store per day, customers per store per day and average transaction size.
Sales per store per day has declined from RM3,140 in FY10 to RM3,132 in FY13 while the average transaction size has increased from RM5.15 to RM5.32 during the same period.
Predictably, this points to declining customers visiting per store from 610 to 589.
Group's gearing was 1.70 times in FY13 but it will fall to 0.76 times after the IPO. (Page 270 of the prospectus)
It is worth noting that the company had net liabilities of 6.72 per share (page 212 of the prospectus) that will change to net asset per share of 13.33 sen after the IPO.
This highlights the pressure on the group's balance sheet.
TA Securities expects earnings to grow by 15 per cent in FY14, 28.1 per cent in FY15 and 31.1 per cent in FY16.
2. How much of commission revenue does it target from MOL?
In September 2013, the group expanded its relationship with MOL, a part the Berjaya family which is owned by the owner of the group, to further expand its areas of collaboration which is expected to increase its commission revenue.
The services include MOL Games Rack and POS application store cards, MOLPay, bill payment and Touch 'n Go.
These services will increase customer traffic in its stores which in turn will help to increase sales of merchandise.
Further details can be found on page 208 of the prospectus.
Growth drivers
According to research by Vital Factor, Malaysian convenience store market is underpenetrated with a penetration rate of 131 stores per million people as compared to 192 stores in Thailand, 340 stores in Japan, 429 stores in Taiwan and 490 stores in Korea.
Hence, the group intends to focus in Malaysia only.
It will continue to penetrate the market by opening more stores.
It targets to open 600 stores between 2014 and 2016, of which 200 will be opened this year alone.
3. Has it identified the locations for opening the stores this year?
Further, it will work together with Chevron Malaysia in opening 23 additional convenience stores at Caltex petrol stations by June 2015.
It will construct a new distribution facility in Shah Alam, Selangor which will be 38 per cent greater capacity than the existing one.
It has already spent RM12 million which includes land cost of RM10.8 million.
The estimated cost of construction is about RM40.8 million.
This facility will be completed by the end of 2015.
Furthermore, it will spend about RM66.3 million for upgrading its IT system to improve its efficiency and productivity.
From 2014 to 2016, it will renovate 600 stores, 200 stores each year, which will cost ranging from RM100,000 to RM150,000 for each store.
About RM27.3 million will be funded from IPO proceeds and the balance from internally generated funds.
4. What could deter its growth plans?
The group has listed down its growth plans via expansion and renovation.
But what is Plan B, if its expansion plan does not materialise as expected.
Further details can be found on page 88 of the prospectus.
Management
Chan Kien Sing is the Non-Independent Executive Director and CEO while Mr Gary Thomas Brown is the Deputy CEO.
Mr Chan is an Executive Director of BCorporation, Berjaya Sports Toto Berhad and BMedia.
He is also the Managing Director of Sun Media Corporation.
Mr Brown has more than 30 years of experience in food, beverage and household products retailing, manufacturing and wholesaling.
He has been associated with companies like Dairy Farm Group, Sara Lee Group, Pos Ad Group Sdn. Bhd and Permanis Sdn. Bhd.
Ho Meng is the managing director of the group.
He is a Director of U Telemedia and U Television Sdn. Bhd., and an alternate Director of U Mobile.
The company is owned by Tan Sri Dato' Seri Vincent Tan Chee Yioun who is also the owner of Berjaya Group.
He will hold 57 per cent after the IPO.
Tan U-Ming is the Non-Independent Executive Director and promoter and son of Vincent Tan.
Further details can be found on page 169 of the prospectus.
Key risks
Low single-digit margins can be affected by increasing costs in future
Group's profit margin was in the range of 2 per cent to 3 per cent between FY10 and FY13.
In future, it plans to add more stores. So, fixed cost will increase due to salaries and rent.
New stores may take three years or more to reach maturity.
In addition, its future expansion and renovation plans will put further strain on finances.
5. Can it improve its profit margin any time soon?
It has only one distribution centre which takes care of 53 per cent of the volume.
So, it runs the risk of fire, power outages and system failure which could damage the inventory.
However, a new distribution centre in Shah Alam, Selangor, will be built by the end of 2015.
6. Will it sell its old distribution centre?
7. What is the market value of the old distribution centre?
Termination of partnership with MOL AccessPortal Sdn. Bhd.
MOL is a payment service provider that facilitates electronic distribution of prepaid mobile phone and online gaming reloads.
Revenue contribution from MOL was 45 per cent in FY10 and 36 per cent in FY13 of total revenues.
However, it cannot guarantee that the partnership will not be terminated.
Meanwhile, MOL is planning to list in the US stock market.
Stores face security risks
Its stores operate on a 24-hour basis which are regularly affected by pilferage, shoplifting, theft and robbery.
Its insurance policy may not be sufficient to cover the risk.
Further, armed robberies can affect its brand perception and may discourage customers from visiting stores.
Failure to obtain regulatory licenses
Group's stores require license to operate and advertise.
Its 22 stores required trading licences and 49 stores need advertising licences at the time of filing the prospectus.
8. Why did it not wait for the approval before starting to operate the stores?
Page 131 of the prospectus highlights that applications for a Trading Licence for 20 outlets are pending for approval from the relevant local councils.
9. Is it common to start operating new stores prior to approval?
Further details can be found on 43 of the prospectus.
Ongoing litigation
The prospectus highlights an ongoing litigation between 7-Eleven Malaysia and Shell Malaysia.
The dispute is over whether there is a valid master tenancy agreement for 34 7-Eleven stores operated at various Shell petrol stations in Malaysia and one operating from the Jet Melati site, which is not a part of the agreement.
However, Shell Malaysia says that there was not concluded agreement between the parties.
It is demanding double rental of about RM260,464 per month since March 2012 and RM30,388 of rent for eight months for Jet Melati site.
Accordingly, the group has made provisions in FY12 and FY13 for the potential payment of double rental to Shell Malaysia.
10. Did it see diminishing probability of winning the case against Shell Malaysia that it made provision for the losses in the last two fiscal years?
11. Why not publish the agreement with Shell Malaysia in the prospectus?
This should be so easy to resolve. If there was an agreement, let’s see it.
Further details can be found on page 449 of the prospectus.
Dividend policy
The group targets a payout ratio between 30 per cent and 50 per cent.
This translates to a dividend yield of 0.91 per cent and 1.52 per cent or 1.26 sen and 2.10 sen per share.
In the past four years, the ratio was 55 per cent in FY10, 39.8 per cent in FY11, 0 per cent in FY12 and 461.9 per cent in FY13.
Further details can be found on page 290 of the prospectus.
IPO proceeds
RM 184.8 million for capital expenditure
RM 42.7 million for working capital
RM 22.9 million for listing expenses
Total gross proceeds from the IPO is RM731.8 million out of which RM481.5 million will go to the selling shareholder.
Further details can be found on page 19 of the prospectus.
Issue details
Total Offer Size: 530.3 million shares
Price per share: RM1.38/share
New shares: 181.4 million shares
Vendor shares: 348.9 million shares
Placement shares: 490.8 million shares
Public shares: 39.6 million shares
12. Why are cornerstone investors not subject to lock-up period?
According to Page 23 of the prospectus, eight cornerstone investors have agreed to take up more than two-thirds of the IPO, but none of them are in a lock-up period.
The investors are AIA Group, UOB Asset Management Malaysia Bhd., Macquarie Funds Management, York Capital Management, Albizia ASEAN Opportunities Fund, Matthews International Capital Management LLC, Genesis Investment Management LLP and Capital Research & Management Co.
Key financials at listing
Market cap: RM 1.7 billion
Price/Book: 10.4x
Price/Earnings: 32.9x
We have tried to send these questions to the company – not an easy job as it does not have an Investor Relations page on its website: 7-Eleven Malaysia Bhd. — Investor Central
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