Wednesday 28 Feb 2024
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This article first appeared in The Edge Malaysia Weekly on July 25, 2022 - July 31, 2022

COMPETITION in the convenience store industry is getting much stiffer in view of the number of new entrants in the market. At the same time, the pharmacy business has become increasingly intense, given the number of large retail chains and independent outlets that have sprouted up. This could explain why 7-Eleven Malaysia Holdings Bhd is contemplating selling its pharmaceutical arm, in which it gained control just two years ago, to conserve more cash.

Last week, Bloomberg, quoting sources, reported that 7-Eleven’s disposal of its 75%-owned Caring Pharmacy Group is on the cards, at a price tag of close to RM1.8 billion. Motivasi Optima Sdn Bhd owns the remaining 25% in Caring.

In an email reply to The Edge, 7-Eleven says the group is still at a very early stage of discussions with a number of parties over the sale of its stake in Caring.

“If any of these discussions progresses to something more serious or concrete, our board will deliberate any potential offers before we make any necessary announcements.

“Caring has been an excellent acquisition for us and has done extremely well since. Indeed, a few parties did inquire and express interest in the past, and of late, quite a few more,” it notes.

The group adds that the pharmaceutical segment had shown much resilience over the pandemic, and will continue to strengthen its market share together with The Pill House and Wellings group.

“And through the recently announced joint venture with PT Era Caring Indonesia, the group entered the Indonesian market this year with four stores opened to date under the Wellings brand.”

In a July 19 note, CGS-CIMB Research analysts Khoo Zhen Ye and Walter Aw estimated that 7-Eleven could rake in RM1.3 billion based on its 75% stake in Caring if the deal is worth RM1.8 billion.

“It is an earnings-accretive deal, but we can’t be sure if it will happen or not because the valuation is at a premium,” Khoo tells The Edge.

At RM1.8 billion, Caring is valued at 56.7 times price-to-earnings (PER) ratio, more than twice the 27 times PER just two years ago when 7-Eleven acquired Caring.

While the deal — if it materialises — would move 7-Eleven into a net cash position from net debt of RM484 million as at end-March 2022, the group would face the loss of income from the pharmaceutical segment. In the financial year ended Dec 31, 2021 (FY2021), core profit from pharmaceuticals was higher at RM42 million compared with the convenience store’s RM40.2 million.Nonetheless, analysts are not too concerned. Khoo highlights the potential interest savings of RM40 million to RM50 million a year for the group. Moreover, he says net profit from pharmaceuticals was not that high after taking into account the debt incurred to fund the acquisition of Caring.

Caring completed the acquisition of The Pill House Sdn Bhd and Wellings Pharmacy Sdn Bhd in FY2021. This brought its total combined outlet count to 191 during the year under review.

Caring was delisted from Bursa Malaysia in May 2020 after 7-Eleven received valid acceptances for the mandatory general offer for Caring shares at RM2.60 apiece, or RM143.51 million cash.

Kenanga Research’s analyst Tan Jia Hui says while the pharmaceutical segment still presents steady medium-term growth on the back of prolonged Covid cases and strong personal hygiene awareness, management can unlock its value if the valuation is set at a premium or fair value. “I believe management can focus on the convenience store business with the additional capital,” she adds.

Preliminary results from 7CAFé outlets encouraging

Since last year, 7-Eleven has been expanding its 7CAFé outlets, which offer a better selection of ready-to-eat products. More than 30 outlets have been opened throughout the Klang Valley, with its flagship store in Puchong launched last month. It is targeting to increase its store count to between 100 and 150 this year.

7-Eleven shares that the preliminary results from 7CAFé outlets have been “very encouraging”, with improved sales productivity and sales contribution from food compared to normal stores. However, it declined to share the profit contribution from this new concept.

This move is to keep up with the pace of the industry, especially outlets from South Korea, where the convenience store market is dominated by 7-Eleven, CU, GS25, emart 24 and Ministop.

Early this month, GS25’s operator GS Retail announced that it is partnering local retail conglomerate KK Group in its venture into the Malaysian market. KK Group, owned by Datuk Seri Dr K K Chai, operates more than 600 convenience stores, in addition to a hotel and resort business. The partnership has a target to open 500 GS25 stores in the next five years, with the first outlet slated for next year. Malaysia is the third overseas market for GS25 after Vietnam and Mongolia.

Despite heated competition, 7-Eleven says new entrants into the market are able to help grow and shape the convenience store sector in a positive manner.

“As the largest convenience store operator in Malaysia, we will strive to continue delivering a seamless shopping experience across our network of stores by focusing on our key business strategies, improving assortment, upgrading our infrastructure, operational excellence, growing our store base and digitally enabling the organisation.”

According to the Retail Industry Report for 1Q2022 by the Retail Group Malaysia, the mini market, convenience store and cooperative sub-sector sales recorded a 7.6% year-on-year growth, while pharmacy sales was a much higher 15.5%.

As a first mover in the convenience store market, Khoo is of the view that 7-Eleven has an advantage, particularly the gap with its competitors.

“7-Eleven has over 2,400 stores versus over 500 stores for MyNews and CU. In addition, 7-Eleven is improving its store concept. Overall, it is good for the company’s margins to sell more fresh food items and exclusive tie-ups with prominent F&B operators.”

Though 7CAFé is positioned at a premium, he opines that 7-Eleven’s food pricing remains competitive.

“We can see that Family Mart and 7-Eleven are getting some good feedback, especially Family Mart. I won’t discount that 7-Eleven might convert some of its existing normal stores to 7CAFé outlets given its strategic locations.”

Tan is also positive on 7-Eleven’s café concept, given that consumers are attracted to the new concept and merchandise.

Going forward, Khoo cautions that 7-Eleven may see some normalisation in demand, with a drop in sales in 2023. “For now, we think the valuation for 7-Eleven is almost there, unless there is a corporate exercise like the disposal of the pharmaceutical business.”

CGS-CIMB has a “hold” call on 7-Eleven given the risks of weaker consumer spending and potential cannibalisation. The stock is trading at a forward 12-month PER of 20.4 times. Year to date, its shares have been stable with a 3.3% rise.

According to Bloomberg, of six analysts covering 7-Eleven, five have “buy” calls while one has a “hold”, with a consensus target price of RM1.81, representing a 16.8% upside compared with last Friday’s closing price of RM1.55, which valued it at RM1.75 billion.

In 1QFY2022, 7-Eleven’s net profit doubled to RM24.38 million from RM11.77 million in the previous corresponding quarter, thanks to a surge in contribution from the pharmaceutical segment on the back of continued consumer focus on personal well-being and healthcare.

In FY2021, the group reported a net profit of RM44.34 million, a 49% jump from RM29.77 million in FY2020. Based on Bloomberg’s consensus estimates, its net earnings are expected to come in even higher at RM87.25 million in FY2022 and RM91.78 million in FY2023.

Tan Sri Vincent Tan Chee Yioun is the largest shareholder of 7-Eleven with direct and indirect stakes of 24.55% and 20.33% respectively. Meanwhile, Taiwanese businessman and banker Tsai Hong Tu owns 20.54%.


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