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Convenience Across The Causeway – 7-Eleven Malaysia IPO
By: Shane Goh
Articles (99) Profile

When the hunger pangs kick in late at night, a person is faced with two options: McDonald’s delivery service or his nearest convenience store.

In Singapore, 7-Eleven, operated by Dairy Farm International Holdings and Cheers, set up by supermarket giant, NTUC Fairprice, are the dominant convenience store players.

A check on their respective websites showed that 7-Eleven’s network spans in excess of 500 stores while Cheers operates 156 outlets nationwide.

Across the causeway, the number of 7-Eleven stores opened to public easily doubles their combined figures. And it’s still growing.

On 8 May, 7-Eleven Malaysia Holdings released its initial public offering prospectus to institutional and retail investors.

With 1,583 stores across Peninsular Malaysia and East Malaysia, the firm is the main player in the country with 82 percent of the standalone convenience store market share as of 31 March.

If you include the stores operating at petrol stations, 7-Eleven Malaysia still dominates 38 percent of the market.

The company runs 1,417 of the stores while the remaining 166 outlets are operated by its franchisees.

The firm is seeking to float 43 percent of its shares at RM1.38 apiece. The listing is expected to net 7-Eleven Malaysia RM250.3 million in gross proceeds.

Out of the RM184.4 million intended for capital expenditure, RM50.4 million (27.3 percent) will be directed towards store expansion while RM27.3 million (14.8 percent) would fund store refurbishment.

The construction of its new combined distribution centre will cost RM40.8 million (22.1 percent) while bills for the upgrade of its IT system is expected to hit RM66.3 million (35.8 percent).

Financial Highlights

Over the past four years, 7-Eleven Malaysia Holdings’ turnover has risen at 8.4 percent compound annual growth rate to RM1,672.5 million, up from RM1,313.7 million.

In the same period, gross profit margin has improved 1.8 percentage points to 27.9 percent in FY13. The surge was due to a shift in product mix towards non-tobacco products, such as commissions from its in-store services.

Particularly, mobile phone and online gaming reloads, which incurs negligible cost of sales. This results in a 100 percent gross profit on the commission income, thus, improving gross profit margin.

    Investment Merits

  • License. 7-Eleven Malaysia Holdings is the sole operator of the “7-Eleven” brand in the country with exclusive agreement that expires on 30 November 2033.
    • Clear growth strategy
    • Management targets to open 600 net new stores from 2014 to 2016
    • Accelerate the refurbishment of stores to improve customer experience
    • The firm will invest in its supply chain and IT infrastructure to facilitate growth and improve its operating efficiency
    • 7-Eleven Malaysia will seek to expand its in-store services to drive store traffic
    • Actively managing its product mix and promotional strategy to cater to specified store clusters
  • Number of stores. In 2010, 7-Eleven Malaysia had 1,212 stores at the end of the year. As of 8 May, the firm had 1,583 stores across the country. It represents a growth of 30.6 percent in slightly over three years.
  • Growing revenue and profitability margins.

    Investment Risks

  • Maximum capacity. Eventually, 7-Eleven Malaysia will run out of space to expand into and end up focusing solely on refurbishment.
  • Currency risk. If you are a non-local investor, an unfavourable currency fluctuation could erode your capital and dividend gains.
  • New management. Deputy chief executive officer, Gary Thomas Brown, joined 7-Eleven Malaysia in December 2013. Although his experience is honed from his time with Dairy Farm and Sara Lee, he is currently unproven at the firm.

SI Research Takeaway

7-Eleven Malaysia appears to possess a stranglehold on the Malaysia standalone convenience store with its leading market share position far outstripping its closest rival.

Additionally, the rising top and bottom line suggests promising future financial performance.

Nonetheless, the rich valuation has made me apprehensive about the sinking my money in. At the current price, I’ll opt for a Slurpee instead.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

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