Investment Highlights

• Bison announced a JV with established Japanese food producers as it moves to establish its food processing centre by 1Q19. Meanwhile, Bison has turned more aggressive over its store expansion going forward. We maintain our BUY recommendation but with a higher fair value of RM2.65/share (RM2.55/share previously).

• The Japanese JV partners include Gourmet Kineya and Ryoyu Baking with expertise in fresh food and bakery products respectively. Bison’s exploration into its own production of fresh food is nothing new but, we are buoyed by Bison’s adoption of the best practices and expertise of its established JV partners. It levels Bison to the best practices of famed, high Japanese food standards. Moreover, these JV partners have a track record of overseas presence in countries such as Hong Kong and Vietnam.

• Bison remains in the driving seat with its majority stake of 51% with both partners (refer Exhibit 2). The ready-toeat (RTE) JVs are expected to plough RM70mil in total investment. It consists of RM50mil and RM20mil with Gourmet Kineya and Ryoyu Baking respectively. Bison will contribute 51% of the expected RM70mil, which is RM35mil.

• The RTE JV will be housed in its slated food processing centre, which remains on track to be operational by 1Q19. It will have the capacity for distribution to 600 stores. The capacity should sustain another 3 years of store expansions. It follows Bison’s expected expansion of 90 stores per annum to the current store count of 367 stores as of 30 Sep 2017.

• Strategically, the JV is unquestionably positive. However, we struggle to quantify the long-term strategic enhancement potential to Bison’s already impressive execution of fresh food processing and product development. The JV elevates Bison to the best practices RTE Japanese standards but earnings arising from its food processing are potentially diluted through the JV.

• Meanwhile, we tweak our FY18F/19F earnings upwards by 3%/6% in tandem with its more aggressive store expansion. Key earnings risks 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.

• Our valuations are 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 FY18F-19F EPS by 8% given an enlarged share base of 10%. We continue to like Bison for its excellent execution track record, proprietary ownership over its own brand and attractive 3-year earnings CAGR of 31% over FY16-19F (vs. 7E Malaysia: 6.6%).

Source: AmInvest Research - 6 Oct 2017