Fairly valued. We value BISON at RM1.50, based on 21.7x PER FY17E as we think that positives have been priced in. Its 1H16 results have shown healthy growth across top line and bottom line thanks to increasing numbers of outlets. We project net profit to grow by 21-31% in the next two years, backed by aggressive store expansion and increasing contribution of F&B products. Being home-grown, BISON’s strength mainly lies in its flexibility to dictate own business model and strategy.

Comprehensive growth. 1H16 revenue of RM126.0m and net profit of RM9.8m represented 58% and 73% of FY15 figures, respectively. We believe the commendable growth was mainly driven by the net addition of 28 outlets in 1H16, which lifted total number of store to 257 (excluding 8 WH Smith outlets and 1 Bison Café). Meanwhile, 1H16 gross margin expanded by 2.2ppt to 36.4% from 34.2% in FY15 as the Group’s strategy of increasing contribution from higher margin food & beverage (F&B) products bore fruit.

Rapid profit growth envisaged. Moving forward, BISON is looking to open 70 new outlets per year in order to expand its network and consolidate its market position. As a comparison, biggest competitor, Seven Eleven Malaysia (SEM) is targeting to open 200 new stores per year. While the absolute number of BISON’s targeted new store opening is lower than SEM’s, the low base effect will render BISON the advantage as 70 new outlets/year represents 32% from the base of 221 myNEWS.com stores in FY15 as compared to mere 10% from the base of 1,944 SEM stores in the same period. Thus, we believe BISON would be a more valuable proxy for investors seeking exposure in the burgeoning local convenience store sector as we are projecting its net profit to grow by 21-31% in the next two years.

To manufacture own food products. BISON has announced an acquisition of a piece of freehold vacant land in Rawang measuring 1.4 acres for RM6.8m or RM113/sf. The Group is planning to construct a food processing centre on the land in order to produce ready-to-eat food to meet the need of its outlets. As the land is just 500m away from its existing main distribution centre, the Group is expected to benefit logistically from close proximity when the food processing centre is completed by end-2018. While the move is in line with the Group’s plan to increase the contribution of its F&B products to its portfolio, we are somehow concerned with the Group’s exposure into the manufacturing sector and associated risk.

Not Rated with Fair Value of RM1.50. We derive our Fair Value of RM1.50 after pegging 21.7x PER to projected FY17E EPS of 6.9 sen. The valuation represents 15% discount from the valuation we ascribed to SEM (NR; FV:RM1.52) in view of its smaller market capitalization (RM310m vs RM1.6b), fewer numbers of stores in comparison as well as the appeal of SEM international brand name. The stock has gained 33% since its IPO listing on end-March and we think the positives have been fairly priced in.

The freedom to dictate. Apart from the investment edge in terms of growth potential as mentioned above, BISON also enjoys flexibility in implementing its own business model and strategy with no obligation to adhere to the general plans or visions of a parent company or headquarter. Thus, the luxury of flying with its own wings allows it to react faster to any change in local consumer behaviour or preference. On top of that, being a home-grown business also gives BISON the financial advantage as it will be spared from paying royalties.

Source: Kenanga Research - 28 Jul 2016