Maintain HOLD, unchanged DCF-TP of MYR4.20

QL’s venture into the convenience store space is short term neutral, given the gestation period of new stores and since the first store will only open end-2016. Over the longer term, earnings accretion will very much depend on FamilyMart’s ability to differentiate itself from its peers. We keep our earnings forecasts and HOLD call with an unchanged DCF-TP of MYR4.20 (7.5% WACC & 2% LT growth).

Bringing Japan’s FamilyMart to Malaysia

QL’s wholly-owned subsidiary, Maxincome Resources Sdn Bhd has signed an area franchise agreement (AFA) with FamilyMart Co.Ltd of Japan. The AFA will give QL the exclusive master franchisee rights to develop and operate FamilyMart for 20 years; renewable for subsequent periods of 20 years at Franchisee’s option. FamilyMart Co., Ltd has over 17,540 stores in 7 countries worldwide as at 31 March 2016.

300 stores in five years

QL aims to open 300 stores in Malaysia in five years, with the first store to be opened by Dec 2016. We deem the store expansion plans to be moderate (est. 60 stores per year). Assuming the cost of new store opening to be about MYR250k, the capex for 60 stores per year would work out to be about MYR15m/year. In contrast, 7-11 Malaysia (SEM MK, HOLD; TP:MYR1.38) has 1,944 stores (as of end-Dec 2015) and plans to open up to 200 new stores a year. Bison (BISON MK: Not Rated) meanwhile, has 229 stores (as of end-Oct 2015) and plans to open 115 stores by end-Oct 2017.

Minimal contributions in near term

Factoring in initial start-up costs and sales ramp-up, it typically takes up to 3 years for a convenience store in Malaysia to breakeven. As such, we do not expect any major contributions in the near term. Over the longer term, positive accretion to the group would very much depend on FamilyMart’s ability to differentiate itself from existing competitors such as 7-11 Malaysia and Bison e.g. by offering more food and fresh food lines which carry better margins.

Source: Maybank Research - 12 Apr 2016