7-Eleven (M) Holdings Bhd
(Nov 7, RM1.70)
Initiate coverage to “hold” with a target price (TP) of RM1.78: With 1,623 stores nationwide, 7-Eleven (M) Holdings (7EM), through wholly-owned subsidiary 7-Eleven Malaysia Sdn Bhd (7-Eleven [M]), commands a dominant 82% share of the domestic stand-alone convenience store market (38% if we include petro marts), according to Vital Factor Consulting Sdn Bhd.

With a new management at the helm, and more clearly defined and dynamic growth strategies in place as well as initial public offering (IPO) proceeds to jump-start its expansion, 7EM is poised for strong growth ahead.

Key drivers include: i) 200 new store openings per annum (pa) (three-year compound annual growth rate [CAGR] of 11%); ii) higher sales from refurbished stores (also 200 stores pa); and iii) increased contributions from in-store services which carry superior margins.

Coupled with a more targeted merchandising strategy, multi-pronged promotional activity and a push-up of the value chain towards higher-margin products, we expect the group’s same-store sales growth to expand to 6% in 2015 from negative 0.1% in 2013, with net profit margin rising to 3.6% from 3.1%.

Our TP of RM1.78 tags on a 2015 price-earnings ratio of 26.6 times, which in turn is pegged to the valuation of CP ALL Public Co Ltd (CP ALL) of Thailand. CP ALL has over 7,800 stores but 7EM offers faster growth with a projected three-year earnings per share CAGR of 25% versus 23% for CP ALL, which translates to a price-earnings growth of just 1.3 times versus 1.5 times for CP ALL. — Maybank IB Research, Nov 7

This article first appeared in The Edge Financial Daily, on November 10, 2014.