This article first appeared in The Edge Financial Daily, on April 13, 2016.

QL Resources Bhd
(April 12, RM4.32)
Maintain hold with an unchanged target price of RM4.20: QL Resources Bhd’s wholly-owned subsidiary Maxincome Resources Sdn Bhd has signed an area franchise agreement (AFA) with FamilyMart Co Ltd of Japan.

The AFA will give QL the exclusive master franchisee rights to develop and operate FamilyMart for 20 years, renewable for subsequent periods of 20 years.

FamilyMart had over 17,540 stores in seven countries worldwide as at March 31, 2016.

QL aims to open 300 FamilyMart stores in Malaysia in five years, with the first store to be opened by December 2016. We deem the store expansion plan to be moderate.

Assuming the cost of a new store opening to be about RM250,000, capital expenditure for 60 stores per year would work out to be about RM15 million.

In contrast, 7-11 Malaysia Holdings Bhd has 1,944 stores (as of the end of December 2015) and plans to open up to 200 new stores a year.

Bison Consolidated Bhd, meanwhile, had 229 stores as of the end of October 2015, and plans to open 115 stores by the end of October 2017.

Factoring in initial start-up costs and sales ramp-up, it typically takes up to three years for a convenience store in Malaysia to break even.

As such, we do not expect any major contributions in the near term. In the longer term, positive accretion of the group would very much depend on FamilyMart’s ability to differentiate itself from existing competitors, such as 7-11 and Bison, by offering more food and fresh food lines, which carry better margins. — Maybank Investment Bank Research, April 12