7-Eleven Malaysia Holdings Bhd
(June 26, RM1.71)
Initiating coverage with hold call and target price of RM1.85: We like 7-Eleven for its dominant status in Malaysia, which gives it a significant competitive advantage. There is substantial room for improvement as it did not focus on store profitability in the past. However, we believe that this has been factored into the share price.
Hence, we initiate coverage on 7-Eleven with a “hold” call. Our target price is based on 26.2 times calendar year 2015 (CY15) price-earnings ratio at 20% premium to its peers’ average, given: (i) its stronger earnings growth and return on equity; (ii) the lack of investable consumer stocks in Malaysia.
Our channel checks revealed that there could be 30,000 to 40,000 traditional convenience stores in Malaysia which 7-Eleven could displace. This will provide further growth if 7-Eleven resumes its franchising programme.
7-Eleven is the country’s largest convenience store operator, with a 82% market share of the standalone convenience store segment and a 38% market share of the overall convenience store segment.
The master franchise rights granted by 7-Eleven USA give 7-Eleven Malaysia the right to operate and sub-franchise the 7-Eleven business in Malaysia and Brunei. As at April 10, 2014, the company had 1,583 stores in Malaysia. It plans to add 600 stores in financial year 2014 ending Dec 31 (FY14) to FY16.
Apart from the support that it receives from 7-Eleven USA, the Malaysian company has a strong alliance with the Berjaya group, which gives it a competitive edge in terms of costing and business opportunities.
Apart from increasing its top line by opening new stores, 7-eleven also aims to improve same-store-sales growth (SSSG) and profitability.
Management has also decided to build its first combined distribution centre to centrally manage inventory and store products. It also intends to embark on a major renovation programme.
We anticipate that 7-Eleven will achieve three-year net profit compound annual growth rate of 29% on the back of 3% to 4% of SSSG, driven by new store openings and greater operating efficiency. — CIMB Research, June 26
This article first appeared in The Edge Financial Daily, on June 27, 2014.
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