Higher net profit margin compared to peers (c7%-c8% vs peers’ c2%- 5%). BISON’s profitability is head and shoulders above local peer 7- Eleven Malaysia (SEM) and regional peers as we expect BISON to command stronger net profit margins (c.7% to 8%), higher than the peers’ net profit margin range (c.2% to 5%), on the back of aggressive expansion strategies, higher margin products mix as well as BISON’s flexibility to customize its stores to maximize potential earnings, and lower operating expenses. Currently, high margin products contribution is at 53% of revenue and 75% of gross profit. There are two segments in which the group will be focusing on, namely Food & Beverages and non-food segment comprising Advertising and Promotion & consumer services.

Potential long-term growth to be unlocked. The expected commissioning of its sub-DC in Johor by end-2017 will facilitate more opening of outlets in Johor and Melaka with improvement in delivery time, and reduction in operating expenses. Additionally, with the expected completion of their in-house food processing facility by end-2018, we believe more high-margin products mix will be available. On the other hand, the new money changing services (Travelex : currently at 3 outlets) and Money Transfer services (Western Union, currently at 2 outlets) is an added value to the outlets, and we foresee a gradual increase of c.3 outlets offering such services per year, subject to BNM’s approval.

Stronger earnings growth of 41% and 29% for FY17E and FY18E, respectively. We estimate FY17E net profit of RM25.6m (+41%) from the opening of 65 net new outlets, raising the store-base to 359 outlets. For FY18E, we foresee growth momentum to continue with forecast net profit of RM32.9m (+29%), on the back of another expansion of 65 net new outlets to 424 outlets. For both years, we expect improvement in EBITDA margins at 9% (+0.6pts) and 11% (+1.2pts), respectively, with the shift into higher margins products. With solid net cash position and operating cash flows forecasted to register between RM32.3m-RM36.7m for FY17E- FY18E, the group has sizeable financial capacity to fund its targeted expansion.

Initiate coverage at MARKET PERFORM and TP of RM2.50. Our TP is based on target PER of 23x, in line with CY18 average regional peers PER, against FY18E EPS of 10.6 sen. We believe the valuation is not excessive given its high double-digit net earnings growth, stemming from aggressive expansion of outlets and solid net cash position. Our valuation is at discount to BISON’s local peer, SEM, which trading at FY18E PER of 27.7x. We believe the comparison is fair, given BISON’s lower dividend yield and ROE ratio. BISON is currently trading at rich valuation and its share price has doubled since listing.

Source: Kenanga Research - 17 Jul 2017