7-Eleven’s 75%-owned Caring Pharmacy Retail Management SB has proposed to acquire the following equity interests and business assets for RM48.9m cash including: (i) 67% interest in The Pill House Pharmacy SB which operates 22 Georgetown Pharmacy stores, and (ii) proposed acquisition of 60% equity interest in Wellings Pharmacy SB which operates 4 Wellings Pharmacy stores at acquisition PERs ranging from 2.7x to 10.4x. Our preliminary estimates based on information available in the announcement suggest this acquisition to be mildly earnings accretive. But we are keeping our FY21E CNP unchanged for now pending confirmation of further details as we track the progress of the acquisition. Maintain MP for now, with unchanged TP RM1.30.

Acquiring 26 pharmacy stores. In an announcement to Bursa Malaysia, its 75%-owned Caring Pharmacy Retail Management Sdn Bhd proposed the followings: (i) acquisition of 67% interest in The Pill House Pharmacy SB (TPH) for RM25.5m cash which operates 22 Georgetown Pharmacy stores, and (ii) proposed acquisition of 60% equity interest in Wellings Pharmacy SB (Wellings) which operates 4 Wellings Pharmacy stores for RM19.90m cash. Concurrently, upon completion of the earlier agreements, Caring and TPH will enter into the following agreements: (i) with Farmasi Sri Nibong SB (FSN) for the proposed acquisition of certain business assets in 3 outlets currently held by FSN for RM3.0m cash, and (i) with Farmasi Sri Nibong (Pekaka) SB (FSNP) for the proposed acquisition of certain business assets in an outlet currently held by FSNP for RM0.45m cash. Upon completion of the earlier agreements, Caring will entered into put and call option agreements: - (i) to acquire all the remaining shares in TPH and (ii) to acquire all the remaining shares in Wellings. The proposed acquisition will be funded via internally-generated funds of the SEM group. We view this latest corporate development by SEM mildly positively as although its immediate impact to earnings is minimal, there is longer term value to be reaped in terms of realisable economies of scale in logistics, inventory management and procurement support. The proposals are expected to be completed by year-end.

Acquisition PER ranging from 2.7x to 10.4x. Based on the latest available financial information in the announcement, the proposed acquisition PERs work out to be as follow:- Proposed TPH acquisition at 10.4x, Proposed Wellings Acquisition at 7.2x, Proposed FSN business acquisition at 2.3x and proposed FSNP business acquisition at 2.7x.

Impact to financials. As at 30th June 2020, SEM net debt-to-equity stood at 2.9x, based on RM385.7m of net debt on total equity of RM131.1m. While the overall impact on the consolidated balance sheet post acquisitions is unclear at this stage due to unavailability of financials, gearing should likely rise further. In terms of earnings impact, we expect these acquisitions to be mildly earnings enhancing to FY21E EPS assuming they are completed by the year end. Our preliminary estimates show FY21 EPS enhancement of 5%, and could potentially increase our TP to RM1.35. However, we keep our FY21E CNP unchanged as well as our TP until completion of the proposed acquisition.

Expanded stores base. The proposed acquisitions are part of its expansion plan to enter the northern part of Malaysia covering Penang, Kedah and Perlis and serve as a new platform of growth for the pharmacy business of the enlarged SEM group with immediate access to fully-licensed and operational pharmacy business in the North Malaysia region with readily available large customer base.

Maintain MARKET PERFORM and TP of RM1.30 based on 27x FY21E EPS (which is in line with regional peers’ average PER).

Key risks to our call include: lower–than-expected sales, and higher than-expected operating expenses.

Source: Kenanga Research - 6 Oct 2020