Highlights

• To date, QL has opened two FamilyMart convenience store outlets in Wisma Lim Foo Yong, Kuala Lumpur and Mid Valley City, with a further two scheduled for opening in TTDI and KLIA2 in the near future. To recap, QL is the master franchisee of FamilyMart in Malaysia for the next 20 years and plans to open 300 stores within the next 5 years.
• Management guides that each store has a capex requirement of RM250k-350k, the group has earmarked up to RM20m/year for store expansion.
• QL expects its emphasis on its ready-to-eat (RTE) meals to be the main differentiating factor to its peers, 7-Eleven and MyNews.com (Bison). The group intends to dedicate a larger area of floor space to indoor seating area, and stock a wider range of RTE meals such as oden (Japanese skewered fish cakes), fried karaage chicken, onigiri, and soft-serve ice-cream. Despite FamilyMart’s meals being priced slightly higher than its peers, most do not breach the RM10/pack psychological threshold, which we believe is key to attracting customers.
• FamilyMart also offers made-to-order steamed milk coffee for upwards of RM6, which is expected to attract significant office crowds as it represents a cheaper alternative to Starbucks and Coffee bean (>RM12). While we note that 7-Eleven offers hot black coffee for RM2, we do not see this as a like for like product due to significant differences in taste and presentation and therefore, will attract different types of customers.
• Going forward, QL plans to integrate courier services (delivery and collections) as well as bill payments.

Risks

• Volatile commodity prices.
• Occurrence of El-Nino will impact ILF productivity due to heat stress as well as reduce FFB output in POA business segment.

Forecasts

• Unchanged

Rating

HOLD ↔

• We like QL due to it’s defensive nature and stable earnings.
• The contribution from QL’s FamilyMart venture, while viewed as a positive move with various synergies to the group, is not factored into the valuation as it will take several years of gestation before turning profitable.

Valuation

• We maintain our HOLD call with unchanged TP of RM4.35 based on a PE(x) valuation of 23.5x FY18 earnings.
• While QL is a well run company with strong fundamentals, robust growth track record, and diversified revenue streams, we believe the stock is fairly priced at current levels.

Source: Hong Leong Investment Bank Research - 05 Dec 2016