This article first appeared in The Edge Financial Daily, on April 19, 2016.
7-Eleven Malaysia Holdings Bhd
(April 18, RM1.39)
Maintain hold with a target price (TP) of RM1.38: Collaboration with a sizeable food supplier could enhance 7-Eleven Malaysia Holdings Bhd’s food supply chain. In the longer term, earnings enhancement would depend on the demand for its potential food offerings. We maintain our earnings forecasts, “hold” call and TP of RM1.38 (financial year 2017 [FY17] price-earnings ratio of 25 times).
Last Tuesday, 7-Eleven entered into a memorandum of understanding (MoU) with Brahim’s Holdings Bhd’s SATS Food Services Sdn Bhd (BSFS) to collaborate and cooperate in the food supply chain.
Under the MoU, BSFS shall supply menu specifications and products to be marketed through 7-Eleven’s convenience stores domestically. Meanwhile, 7-Eleven will provide a centralised distribution centre (CDC) to BSFS to handle products delivery.
The terms of the agreement were not disclosed, but 7-Eleven’s net cash position of RM120 million (end-December 2015) provides it with an opportunity to invest in a new CDC should the project really require a new one.
Recall that 7-Eleven had in November 2015 reallocated its unutilised balance of RM41 million proceeds earmarked for its new CDC to working capital, given the availability of third-party capacity around.
To recap, the new CDC had a planned usable warehouse space of 124,000 sq ft (38% in capacity).We understand that some convenience store players domestically have been facing some supply chain issues (for example product quality, consistency and choices) mainly due to the dependence on multiple fresh food suppliers, and scale and reach of the existing food suppliers.
Therefore, collaboration with a sizeable party could benefit 7-Eleven in the longer term in terms of cost efficiencies and consistency of product quality/choices while not having to move away from its core competence of managing convenience stores.
It has been noted that fresh food and services as a percentage of merchandise sales has been fairly stable, estimated at 10%. —Maybank Investment Bank Research, April 18