Highlights

7-Eleven Malaysia Holdings Bhd (7-EH) is the leading convenience store operator in Malaysia with 82% share of the standalone convenience store segment (nearly 1,600 stores).

The IPO of up to 530.3m shares represent 43% of 7-EH’s enlarged share capital, comprising 490.8m shares under the Institutional offering and 39.5m shares under Retail offering.

The IPO is expected to raise a total of RM250.3m from the Public Issue, which will be utilized to fund store expansion and refurbishment, construction of a new combined distribution center (CDC), and upgrade of IT systems.

Catalysts

Store expansion and refurbishment. 7-EH is accelerating new store openings, targeting 600 new stores over 3 years, bringing the total network to over 2,000 stores by 2016, with 30-35% concentrated in the Klang Valley. 7-EH is also accelerating store refurbishment plans on 600 existing outlets (60% major upgrades, 40% minor), with the aim of targeting a younger customer mix.

Introduction of new products & services. In addition to existing in-store services such as, mobile phone and online gaming reloads, management plans to expand its Touch ‘n Go reload services, and add utility bill payment and ecommerce facilities for online purchases at stores. Management is also looking at improving product mix at stores and increasing bundling promotions to boost sales.

Improving product mix targeting higher-margin commissions from in-store services & non-tobacco products.

Investing in IT & supply chain improvements to improve inventory management and cutting lead time by 40%.

Low penetration levels. According to Vital Factor Research, Malaysia has 131 convenience stores per millionth population compared to Thailand’s 192, Japan’s 340, Taiwan’s 429 and Korea’s 490. Malaysia’s convenience store annual sales per capita was also relatively low in 2012, at RM116 compared to Korea’s RM629, Taiwan’s RM1,242 and Japan’s RM1,691.

Growing population, rising per capita income, and increasing urbanization.

Risks

• Difficulties in executing expansion and refurbishment plans.
• Deterioration in relationship with 7-Eleven USA.
• Disruption in supply chain for products and services.
• Malfunction of IT systems.
• Theft and pilferage of goods and cash at stores.
• Ability to obtain regulatory licenses, permits and approvals.
• Weak consumer sentiment and spending.

Earnings

Driven by aggressive store expansion & refurbishment plans, introduction of new products & services, and improvements in product mix, we expect 7-EH to register revenue and EPS CAGRs of 12.8% and 24.6% respectively from FY13-16F (excluding one-off IPO expenses of RM22.8m).

Valuation

Based on the indicative IPO price of RM1.38 per share, 7- EH’s estimated prospective PER of 20.8x to Dec 2015 is in line with the regional peer average PER of 20.3x. We therefore view 7-EH’s IPO price of RM1.38 per share as fair.

Source: Hong Leong Investment Bank Research - 14 May 2014