Kenanga initiates coverage on 7-Eleven with outperform call
KUALA LUMPUR: The analyst team at Kenanga Investment Bank Bhd (Kenanga Research) has initiated coverage on 7-Eleven Malaysia Bhd (7-Eleven) with an ‘outperform’ rating and a target price of RM1.70.
In a report, Kenanga Research justified its rating by pointing out the 7-Eleven held a very attractive position within the local convenience chain store market as a leader with 82 per cent market share.
This position is set to solidify further as the group has guided its plans to expand its current fleet of 2,186 stores as of June 30, 2017 by an additional 150 new stores per year over the next two years – translating to a health organic growth of seven per cent.
While this growth does fall short of Bison Consolidated Bhd’s guided organic growth of 24 per cent, the research arm explained that this is compensated by 7Eleven’s higher base of stores.
To fund this ambitious expansion strategy, the group has allocated capital expenditure( cap ex) ranging from RM280,000 to RM300,000 per new store with an additional allocation of refurbishment capex at an average of RM100,000 per store.
It is estimated that the average gestation period of a 7-Elevent store is two years.
Based on this information, Kenanga Research estimated that the group’s capex allocation will be circa RM68 million each year for the next two years.
“We believe (this) will be funded through borrowings, as we saw an increase of 73 per cent in borrowing(s) to circa RM200 million from the recent second quarter of financial year 2017 (2QFY17).” To ease the pressure of heavier expenditure, the research arm guides that the group has also been working towards an overhaul in its store operations and end-to-end supply chain operations with comprehensive plans called the ‘Back to Basic’ and ‘Changing the Game’ programmes.
“Overall, the move should improve customer experience and results in cost savings in inventory storage, warehouse operations and supply chain costs across different regions.
“Currently, operating expense is at circa 33 per cent of revenue, and we believe the group is targeting it to be at most at the historical level of circa 30 per cent in FY13 and FY14,” guided the research arm.
But besides just expansion plans and improving operational efficiencies, Kenanga Research opines that one of the biggest strengths that 7-Eleven possess is their strategic relationship with 7-Eleven International, USA (7-Eleven International) and the Berjaya Group.
Having been granted exclusive rights by 7-Eleven International to operate convenience stores under the 7-Eleven brand until 2033, the obvious benefits the group stands to receive are the benefits of sharing international brand equity as well as inventory and operational support.
“In addition, the company is well supported by its major shareholder, Berjaya Retail Bhd, and is able to leverage on the strategic relationship with the Berjaya Group to access its networks, resources, and prime locations at competitive rental rates.
“This includes the group strategic relationship with MOL Global Inc which is part of the Berjaya Group and the Alibaba group for with their Alipay E-Wallet services to provide in-store services,” concluded the research arm.