This article first appeared in The Edge Financial Daily on January 7, 2019 - January 13, 2019

KUALA LUMPUR: Tan Sri Vincent Tan Chee Yioun believes that 7-Eleven Malaysia Holdings Bhd, in which he controls a direct stake of 46%, should be worth more than US$1 billion — more than double the convenience store operator’s current market capitalisation of RM1.68 billion.

The tycoon’s remark seems to have lifted the company’s share price, which rebounded from the low of RM1.27 in mid-December to RM1.50. It closed at RM1.49 last Friday, higher than analysts’ average target price of RM1.28.

However, investment analysts, who track the stock, have yet to put 7-Eleven Malaysia on the recommendation list. Based on RM1.49, the company is valued at forward price-earnings (P/E) ratio of 33.86 times.

It may not be hard to fathom that why Tan is of the opinion that the market has mispriced 7-Eleven Malaysia, considering the company’s initial offer price of RM1.38 was pegged at a P/E of about 51 times in 2014.

But comparing it with the regional peer, CP All PCL which operates more than 10,000 7-Eleven stores in Thailand, it commands a P/E of 33 times with market capitalisation of 649.03 billion baht (RM83.68 billion).

About 57% of the Thai company’s revenue came from the convenient store operation, while its cash and carry business contributes about 36%.

For the financial year ended Dec 31, 2017, CP All’s convenience store operation generated a pre-tax profit of US$536.2 million, which is 63.2% of its total sum of US$693.3 million, while the cash & carry business contributed US$214.5 million.

7-Eleven Malaysia posted a pre-tax profit of RM70.49 million for FY17 compared with RM70.87 million the year before. Revenue came in at 4% higher year-on-year at RM2.18 billion against RM2.1 billion in FY16.

For the nine months ended Sept 30, 2018 its pre-tax profit grew 20% to RM52.7 million while revenue increased by 1.3% to RM1.66 billion.

It is undeniable that Thailand is a substantially larger consumer market compared with Malaysia. Some quarters find that there are also differences between the two operators in terms of products available on shelves.

When contacted a local fund manager, who declined to be named, said that there is still value to be unlocked from the convenience store operator. “The magnitude of 7-Eleven Malaysia’s business in Malaysia, with 2,255 stores as at end-2017 that serve more than 900,000 customers per day, would justify a hefty valuation for the company.

“Let’s say someone wants to start a convenience store chain in Malaysia, can they achieve a similar scale as 7-Eleven? Even if they had the financial resources to do so, it will take time for them to achieve the same feat.

“To me the price tag of US$1billion is reasonable, as one could get instant access to over 2,000 stores that serve close to a million customers per day in Malaysia,” the fund manager commented.

However, he agrees that there is room for improvement for Malaysian operator in order to have the same appeal as 7-Eleven stores in neighbouring Thailand.

To recap, Tan has listed the convenience store chain twice on Bursa Malaysia. The first listing exercise was in 2010 under Berjaya Retail Bhd, which also owned home appliances and furniture under the Singer brand, at an offer price of 50 sen. Tan took it private in less than a year after the shares were floated, citing the company’s dismay share price performance as the reason. It was trading below its offer price.

This time round, Tan intends to do it differently.

He is contemplating to inject his controlling stake in 7-Eleven Malaysia into his flagship Berjaya Corp Bhd (BCorp), in which Tan has taken back the executive chairmanship from his elder son Datuk Seri Robin Tan. Robin remains as the CEO of BCorp. BCorp will then launch a takeover offer to take 7-Eleven Malaysia private.

Tan’s other son, Tan U-Ming, is the executive director of 7-Eleven Malaysia and is also in the company’s senior management team.

Nonetheless, 7-Eleven Malaysia clarified shortly the privatisation plan is Tan’s “personal idea”. The board has not deliberated any of the plans or proposals related to the delisting of 7-Eleven Malaysia.

Etiqa Insurance and Takaful chief strategy officer Chris Eng Poh Yoon opined that the convenience store landscape in Malaysia has changed compared to that of 10 years ago. Competition has intensified with more players coming to share the pie.

7 Eleven Malaysia’s competitors are the likes of the KK Group which operates the KK Supermarts, Mynews Holdings Bhd whosenewsstands have now become myNEWS.com convenience stores. QL Resources Bhd, the master franchisee of the FamilyMart convenience stores in Malaysia, also wants a share. FamilyMart stores are mushrooming in the Klang Valley.

“7-Eleven has to be cautious as its customer base has come under attack. For example, KK Mart targets the lower end of 7-Eleven’s customer base; MyNews is roughly targeting the same customer base as 7-Eleven which is the mid range, while Family Mart is targeting the higher end.

“7-Eleven’s competitive advantage is its large number of stores, therefore it could benefit from economies of scale while the rest are still growing their presence in Malaysia, so investors would factor that in. However, 7-Eleven would need to up their game [in order to stay ahead of competition],” Eng commented.