7-Eleven ... Is It Worth Going For The IPO !!

Name: 7-Eleven Malaysia Holdings Bhd.

Offer Price: rm1.38

Closing Date: 16 May 2014

Listing Date: 30 May 2014

7-Eleven Malaysia’s eight cornerstone investors – Capital Research and Management Genesis, AIA, Matthews International, Macquarie Fund Management, Albizia Capital, York Capital and UOB Asset Management – five are participating as a cornerstone investor in a Malaysia IPO for the first time.

The IPO involves an offering of a total of up to 530.3 million shares of 10 sen each, comprising an offer for sale of up to 348.9 million existing shares and a public issue of 181.4 million new shares.

The retail price is at rm1.38 per issue share.

Rm184.79 million or 73.8% from gross proceeds from the public issue (of rm250.3 million) will be used for capex. Meanwhile 17.1% or rm42.7 million will be utilized for working capital.

The capex allocation which is to be utilized within 3 years is used for the expansion and refurbishment of its convenience stores, construction of its new central distribution centre and upgrade of IT systems.

It plans to continue its store network and will open approximately 600 stores between 2014 and 2016.

After listing, 7-Eleven will be debt free.


Valuations ...

1. At rm1.38, it is priced at 51.1x based on FY2013 EPS of 0.027 sen/share;

2. HL Bank: rm1.38 (Fair Value) based on estimated prospective PER of 20.8x to Dec 2015;

3. TA: rm1.24 (Fair Value) is based on FY2015 EPS of 6.2 sen/share pegging a PER of 20x.

At rm1.38, it is price at a PER of 51.1 times based on its EPS of 2.7 sen after taking into account the adjusted unaudited pro forma consolidated net profit of rm33.3 million for financial year 2013 (FY2013) .

The valuation is also considerably higher than that of its debut in 2010 under its parent company BRetail when its business was valued at an historical PER of 21.7 times on an IPO price of 50 sen per share. It is worth nothing that this time 7-Eleven’s IPO does not include the Singer sewing machine franchise business.

It stated that the retail sector had a re rating, which resulted in a enhancement in the PER of a majority of convenience store operators ranging from 26.1% to 219.7% from the time BRetail was delisted up to Dec 18 2013.

The PER multiple of the FTSE Asian Sector Retail Index had increased by 54.1% from 17.65 times in the same period.

Nevertheless, a better measure would be its forward PER taking into consideration its growth potential. This is especially if the company has plans for expansion and enhancement.

Based on the historical PER, it is expensive especially if benchmark it against the KLCI, which has a long term PER of 15 times.

A good proxy for comparison with 7 Eleven on Bursa is AEON which has a historical PER of 22.8 times.

When compared with Maybank (13x), NESTLE(29x) and SKPetro (24x), 7-Eleven’s valuation looks a little on the high side.

For comparison, Philippine Seven Corp, the operator of 7-Eleven stores in the Philippines has a higher PER multiple of 67.69 times as at Dec 18 2013 than 7-Eleven Malaysia's historical PER multiple of 51.1 times.

Critics however opine that 7 Eleven valuation is not overly expensive as one should look at its growth prospects. Its share price is on the high side, but with 2014’s expected profit, its PER could be 25 times and estimated at 19 times based on next year’s profit.

The company has strength in network, which is at a certain size, so it has economies of scale, and growth will be good. 7-Eleven stores are better than what they were a few years ago, the company bas more networks now (May 2014).

Additionally, other factors to be considered include population growth and the outlook for the retail sector.

7-Eleven has an 82% local market share as at March 2014 with about 1600 stores nationwide.

Its same store sales growth has been declining from 3.4% in 2010 to -0.1% in 2013. This could mean that 7-Eleven would have to rely on new stores for sales growth.

Post listing, BRetail’s shareholding will constitutes 57% of the company’s enlarged share capital.

The rest of the peers while most had an increase in PER multiple, only stood at between 16.80 times and 47.76 times excluding Philippines.


By HL Bank (Fair Value: rm1.38) …

Based on the IPO price of rm1.38, estimated prospective PER of 20.8 times to Dec 2015 is in line with the regional peer average PER of 20.3 times.

Expect it to register a cumulated average annual growth rate (CAGR) of 12.8% between financial years 2013 and 2016. The growth rate would be supported by new store openings and higher commissions from in-store services.

Driven by aggressive store expansion and refurbishment plans, introduction of new products and services, and improvements in product mix, expect 7-Eleven Malaysia to register revenue and earnings per share, CAGR of 12.8% and 24.6%, respectively, from FY13-16F, excluding one-off IPO expenses of RM22.8 million.

7-Eleven Malaysia plans to raise up to RM731.85 million in its IPO, which will be used to fund store expansion and refurbishment, construction of a new combined distribution center and upgrade of IT systems.

The IPO of up to 530.3 million shares represents 43% of its enlarged share capital, comprising 490.8 million shares under the institutional offering and 39.5 million shares under retail offering.


By TA (Fair Value: rm1.24) …

At rm1.38, the valuation is deemed stretched, prompting it to place a lower target price of rm1.24 for the stock. RM1.24 is based on a FY2015 EPS of 6.2 sen/share pegging a PER of 20x.

Versus other retail stocks, the FBM KLCI and peers with regional presence are more superior in terms of market cap, net margins and dividend yields.

It valued 7-Eleven included its dominant 82% market share in the convenience store segment, strong brand name and position as the sole operator of 7-Eleven convenience stores within Malaysia and Brunei until 2033.