Investment Highlights

• Bison Consolidated (Bison) steadfastly delivers on earnings. We upgrade our recommendation to BUY from HOLD following its share price retracing some 15%. It follows the corporate exercise announcement, which we feel is overdone. Our fair value of RM2.55/share is pegged to an unchanged PE of 27x CY18F earnings, which is in line with 7-Eleven Malaysia’s (7E Malaysia) historical valuations. Our FV has factored in the impact arising from its corporate exercise, which dilutes FY18-19F EPS by -8% given an enlarged share base of 10%.

• We like Bison for its excellent execution track record and attractive 3-year earnings CAGR of 31% over FY16-19F (vs. 7E Malaysia: 6.6%). It has the potential to enhance margins going forward through: i) its own in-house food processing centre; and ii) greater economies of scale.

• Bison reported a 3QFY17 core net profit of RM6.2mil (QoQ: -1%, YoY: 52%). It brought cumulative earnings to RM18.7mil (YoY: 36%). Earnings were in line with our and consensus estimates, both at 78%. No dividend was declared as expected.

• Top line for the quarter grew 26% YoY, driven largely by marginally higher in-store sales and store expansion of 22%. It brought the store count to 338 stores as of end- 3QFY17 (vs 3QFY16: 276). Its 9MFY17 cumulative store openings totalled 44. However, we expect for the final quarter to achieve its intended store expansion of 70 for FY17.

• Meanwhile, gross margins for the quarter improved, as it elevated cumulative gross margins to 37.1%, representing an improvement of 1.4ppts. This was off the back of a better product mix. Notably, Bison commands higher gross margins against 7-Eleven Malaysia (adj FY16: 36.2%) despite having only 16% of 7-Eleven’s 2,122-strong stores and by extent, lower bargaining power with its suppliers. Therefore, further gross margin expansion is well within reach in tandem with Bison’s aggressive store expansion strategy.

• To recap, Bison proposed multiple corporate exercises on 30 Aug 2017. It would effectively have raised RM77.5mil for: i) an acquisition of an industrial land for the purposes of warehousing and accommodating an enlarged corporate head office; and ii) working capital. While we are neutral over the strategic nature of the exercise, it is rather dilutive. The dilution of FY18-19F EPS by 8% takes into account of the private placement, which would enlarge the share base by 10%.

• We leave our earnings unchanged as earnings were within our estimates. Key risks to Bison include: 1) excise duty hike to cigarettes, which would lower foot traffic and related spillover spending; 2) restrictions on foreign labour supply; and 3) delay in food-processing centre setup.

Source: AmInvest Research - 26 Sept 2017