This article first appeared in The Edge Malaysia Weekly on August 19, 2024 - August 25, 2024

THE initial public offering (IPO) of 99 Speed Mart Retail Holdings Bhd is probably one of the most talked about topics among the investing fraternity.

The listing exercise that will offer 1.428 billion shares will be the biggest on Bursa Malaysia in seven years, raising RM2.36 billion at RM1.65 per share. The amount is more than what was raised by MR DIY Group (M) Bhd (KL:MRDIY) at RM1.506 billion and Farm Fresh Bhd (KL:FFB) at RM1.06 billion.

Nonetheless, the eye-popping fact is that the founder of the mini market chain, Lee Thiam Wah, and his spouse Ng Lee Tieng are expected to receive RM1.7 billion from the offer for sale of 1.03 billion existing shares.

Prior to the listing exercise, 99 Speed Mart declared a total dividend payout of RM1.176 billion for the financial year ended Dec 31, 2021 (FY2021) to 1QFY2024, compared with the aggregate net profit of RM1.279 billion made during the period. In a nutshell, the couple would have made roughly RM2.876 billion upon completion of the IPO.

It is worth noting that 99 Speed Mart’s market capitalisation of RM13.86 billion at the point of listing is pretty close to Genting Malaysia Bhd’s (KL:GENM) current market cap of RM15.1 billion — currently the lowest on the FBM KLCI — and QL Resources Bhd's (KL:QL) market cap of RM16.1 billion, the second lowest on the benchmark index.

Based on its net profit of RM400.2 million, or 4.76 sen per share, in FY2023, 99 Speed Mart’s shares will have a historical price-earnings ratio (PER) of 34.7 times.

Over the past three years, the company has achieved a compound annual growth rate of 13.3% in terms of its profit after tax. This gives it a price-earnings growth (PEG) ratio of 2.6 times.

Is the IPO expensive?

“I think it is reasonable, considering the business model and expansion plan going forward. The beauty of investment is that it is an art, not a science. Different investors will have different views on whether a valuation is considered attractive or not,” says Peter Lim Tze Cheng, founder and chief research officer of Trident Analytics Sdn Bhd.

However, a fund manager notes that a forward PER of less than 24 times is typically reasonable for a large-cap consumer stock.

A head of research attributes 99 Speed Mart’s valuation to the scarcity premium that super-large-cap consumer stocks typically carry. He cites the examples of FBM KLCI consumer constituents like Nestlé Bhd (KL:NESTLE), QL Resources Bhd (KL:QL) and MR DIY Group that are trading at high PERs of 34 to 43 times.

“For the consumer stocks on the FBM KLCI, people don’t only look at valuations. Most would put more emphasis on the quality of earnings such as stability and the low-risk nature of the business. Typically, high single-digit growth for these consumer darlings would be deemed satisfactory,” he explains.

He points out that 99 Speed Mart’s net profit of RM400 million in FY2023 and operating cash flow of RM925 million as at that financial year would be one of the highest on Bursa Malaysia.

A cursory check by The Edge reveals that 99 Speed Mart is ranked No 60 in terms of profit across the board and 45 in terms of operating cash flow based on the latest audited annual figures.

Operations-wise, its inventory turnover of 49 days is one of the lowest in the industry, compared with the industry average of 66 days, indicating its business volume. The group’s profit before tax margin of 5.8% is also considerably higher than the industry average of 2.6%.

Given these, some expect 99 Speed Mart to be a FBM KLCI component stock.

Upon completion of the IPO, Lee and his spouse will hold a 83% stake in 99 Speed Mart. This means only 17% will be in the public’s hands, including 14 cornerstone investors who will collectively hold 786 million shares, or 9.35% equity interest.

The retailer, which will be listed on Sept 9, has sought a minimum public shareholding spread of 15%. It is worth noting that a moratorium has been imposed on the shares held by Lee and his wife.

The cornerstone investors include AHAM Asset Management Bhd, Areca Capital Sdn Bhd, AIA, Great Eastern Life Assurance, the Employees Provident Fund and the Social Security Organisation (Perkeso).

Besides the offer for sale of 1.03 billion shares, 99 Speed Mart will issue 400 million new shares to raise RM660 million in fresh capital for expansion. Its enlarged capital will balloon to 8.4 billion shares upon listing.

“As long as the new supply of shares is kept at bay, the price of the equities could remain supported,” an analyst comments.

As at March 31, 99 Speed Mart’s cash balance stood at RM78.5 million, against its total borrowings of RM50.7 million. Hence, it has a net cash position of RM27.8 million.

During an investor briefing, the group said it aimed to raise the number of outlets to 3,000 by end-2025 from 2,651 stores now. Currently, 86% or 2,285 of its stores are in the northern, central and southern regions of Peninsular Malaysia. Less than 5%, or 119, of the stores are on the east coast.

The group also said it intended to enter the Kelantan and Terengganu markets soon to ensure that every state would be covered in its network of outlets. 

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