Valuation / Recommendation

We have a SUBSCRIBE recommendation on 99 Speed Mart Retail Holdings Bhd (99Speedmart) with an FV of RM1.99 based on 29x FY25F EPS, translating to a 21% upside to the IPO price. Our target PE is pegged to the average valuation of large-cap consumer stocks listed on Bursa Malaysia. We like the stock for its leading position as a grocery retailer, aggressive outlet expansion, and self-reinforcing moat of its business model (convenience and competitive pricing).

Investment Highlights

Leading grocery retailer. With over 2,651 outlets throughout Malaysia, 99Speedmart is the largest player in the mini-market industry (40.1% market share) and the leading grocery retailer (11.6% market share) based on 2023 revenue. Despite already having a substantial revenue base, the company still achieved an impressive 3-year revenue CAGR of 10.4% from FY20-23, outpacing its competitors and expanding its market share. This growth was largely driven by 1) Aggressive store expansion into new regions; and 2) A positive trend in SSSG, reflecting a shift in consumers' preference towards small-format stores for convenience.

Aggressive outlet expansion. Across FY19-23, 99Speedmart opened about 247 new outlets annually on average, focusing on under-penetrated areas such as the Northern and East Coast regions of Peninsular Malaysia, as well as East Malaysia. Management alluded that it could expand up to 5,000 outlets nationwide, indicating ample room for growth before hitting saturation. 99Speedmart is still maintaining the same aggressive pace of store expansion in FY25F-FY27F, targeting to open 250 new outlets annually. The company will also build new distribution centres (DC) with a target of 25 by 2027 (from 19 DCs currently) to support its outlet expansion.

Self-reinforcing moat. We believe a combination of unique propositions (convenience and competitive pricing) has helped 99Speedmart establish a strong moat for its business model. Its strategy of offering low prices while achieving high sales volumes enables the company to negotiate better terms and benefits from suppliers. These benefits (i.e. product display fees, target incentives, and DC fees) allow 99Speedmart to maintain its low pricing, achieve better profitability, and fund further outlet expansion. Higher number of outlets leads to higher sales, thereby creating a self-reinforcing cycle that further solidifies 99Speedmart's position as Malaysia's leading grocery retailer.

Risk factors for 99Speedmart include (1) Supply chain disruptions, (2) Dependency on the ability to maintain competitive pricing, and (3) Risk of delay in operations due to IT infrastructure disruption.

Source: Mercury Securities Research - 20 Aug 2024