QL has agreed on exclusive rights with Family Mart of Japan – the world’ssecond largest convenience store operator – to roll out 300 storesnationwide over the next five years. The strategic timing of securingprecious retail real estate at upcoming transportation hubs is positive forthe longer term, while near-term earnings impact is likely to be minimal.

Even so, we maintain our earnings forecast pending further details.Maintain NEUTRAL and a MYR4.21 TP with a target P/E of 20x FY17 EPS.QL ventures into convenience stores. QL Resources’ (QL) has announced aan area franchise agreement with Family Mart (8028 JP, NR) as it looks toexpand the world’s second largest convenience-store footprint in Malaysia. Theagreement grants QL – via its wholly-owned subsidiary Maxincome Resources– the exclusive rights to develop and operate FamilyMart convenience stores inMalaysia for 20 years. The agreement is renewable for subsequent periods atthe option of QL as the master franchisee. Meanwhile, QL targets to expand300 FamilyMart stores over five years without significantly impacting earnings inthe near term, ie FY17 (Mar) earnings.

Existing convenience store landscape. The two largest domesticconvenience store operators, 7-Eleven Malaysia (SEM MK, NEUTRAL, T:MYR1.43) and Bison Consolidated (BISON MK, NR) have 1,944 and 255 storesnationwide respectively (as of Dec 2015). When combined, they own c.90% ofconvenience store market share in terms of number of outlets. Meanwhile,7-Eleven and Bison is expected to roll out 400 and 115 new stores over thenext two years respectively. We believe the strategic nature of securingprecious retail real estate at upcoming Klang Valley mass rapid transit (MRT)and light rail transit (LRT) extension stations is vital. The timing of theagreement is rather impeccable as well, as the tender for 41 retail spots at the21 MRT Sungai Buloh-Kajang line stations closes by 18 Apr 2016 (Inside RetailAsia).

Near-term contributions are minimal. Based on our estimates, each storestands to generate up to MYR800,000 in sales with an estimated PBT margin of4-7% (Figure 1). Similar to management expectations, we also expectcontributions to be positive over the medium term as convenience storestypically have a gestation period of one year. Therefore, we expect aninsignificant mpact to FY18 earnings as well, beyond management’sexpectation of FY17. Based on our estimates, the gearing impact to QL’shealthy balance sheet should hover around 30%, should capex be fundedsolely by debt.

NEUTRAL. Our MYR4.21 TP, which reflects a target P/E of 20x FY17 EPS orits 3-year historical mean, and NEUTRAL recommendation remain unchangedpending further details of the agreement. Our corroborative DCF valuationsuggests a MYR4.57 TP. Key risks of the new venture includes execution of anunfamiliar new venture and intense competition from established incumbents.