By Xavier Kong
Even convenience store chains are not immune to natural disasters, and it showed in the latest results of 7-Eleven. The question now is whether the stock remains viable in the long term.
Business model: 7-Eleven Malaysia Holdings Bhd identifies itself as an investment holding company that owns, operates, and franchises a chain of convenience stores under the 7-Eleven brand name in Malaysia.
The first store in Malaysia was opened on Oct 9, 1984, in Jalan Bukit Bintang, Kuala Lumpur, and as of its first quarter ended March 31, 2015 (1Q15), 7-Eleven had 1,802 outlets in Malaysia. Its stores offer a range of grocery and food items, as well as frozen and hot beverages.
The stores also provide bill payment services, mobile phone reload cards, IDD/STD, Touch ‘n Go reloads, Internet games’ starter packs, reloads via MOL Points top-up, ink cartridge refills, as well as photocopying, fax, automated teller machine, and bulletin board services for neighbourhood community notices. Additionally, the group is also involved in the property investment business.
7-Eleven Malaysia Holdings Bhd is also a subsidiary of Berjaya Retail Bhd. It was listed on the Main Market of Bursa Malaysia on May 30, 2014 with a debut price of RM1.45, a 5% premium to its initial share price of RM1.38.
Shareholders and management: Vincent Tan, of Berjaya Group and Cardiff Football Club fame, is the largest stakeholder in 7-Eleven through HQZ Credit Sdn Bhd, with a stake of 51.19%. Following that is Genesis Asset Managers, with a 6.46% stake, and Matthews International Capital Management with a 3.96% stake.
Managing director Ho Meng, as well as chief executive officer Gary Brown, both maintain minority stakes in the group. Notably Gary Brown, prior to his post in 7-Eleven, was a merger and acquisition development director for the Berjaya Group.
Share price performance: Having listed a little more than a year ago, 7-Eleven share prices have seen their highs and lows. On June 17, 2014, its share price hit record high of RM1.95, while on Dec 22, 2014, its share price dropped to its lowest at RM1.22.
However, in the past six months, the stock has recovered to close at a seemingly comfortable RM1.76.
What analysts think: 7-Eleven’s 1Q15 results came in below analysts’ expectations, achieving only 18% of consensus estimates. However, revenue had risen RM51.9 million year-on-year (y-o-y), with net profit rising RM2.7 million y-o-y.
While gross profit had grown 19% y-o-y and revenue growth was 12%, the group was still deemed to have performed below expectations, due to lower-than-expected sales, as well as higher operating costs.
Maybank IB has taken a stance of caution for 7-Eleven’s near-term prospects, citing weak consumer sentiment following the implementation of the goods and services tax (GST) as a reason. GST came into effect from April 1, 2015 onwards.
However, the research house noted that 7-Eleven is on track to meet its target of opening up to 200 new stores and refurbishing 200 stores this year, having already opened 188 stores and refurbished 201 stores at the end of financial year 2014.
RHB IB noted that an additional impact to the group’s earnings was the floods which hit the East Coast of Peninsular Malaysia earlier this year. It also noted that overall sales still increased 11.5% y-on-y.
“7-Eleven also continues to benefit from the expanding of its in-store services, as its commission revenue improved 11.6% y-o-y. We expect the trend to continue, as the company looks to introduce more utilities payment services in the near future. Negotiations are also ongoing for it to provide courier-type services,” said RHB IB.
The bank-backed research house also added that the group had opened 57 new stores and had refurbished 50 outlets in 1Q15. RHB IB echoed the sentiment that 7-Eleven is on track to meet its target.
Earnings forecast:
StockStalk: Although 7-Eleven is a relatively young stock, it is not exactly a young business, having been around since 1984 in Malaysia. Bursa Marketplace has the group valued as a stock that is demonstrating good growth, efficiency, and quality.
The group might have been marked as coming below expectations, but it should be noted that the slump is caused by natural disasters, which remain outside the control of the group. The group still managed to report a growth in revenue and profit despite those factors.
However, this recent slump has hurt the stock in a different way, in that it has shown that volatility still affects the group, despite the numerous offerings available at its stores. Weak consumer sentiment may hurt everyone, but for a convenience store chain, this impact may be felt worse than others.
Still, the group has strong fundamentals, in which they remain on track for their plans moving forward to open new stores as well as refurbish old stores, which would aid to boost earnings growth moving forward.
Furthermore, the group is introducing another 140 stock-keeping units in addition to the more than 2,200 that it already offers, as an effort to improve merchandise mix which can only help the group.
Last traded at RM1.76, the group is at a slight premium compared with its regional listed peers. This, in turn may hinder some investors looking to get in on the stock right now. However, it’s a matter of getting what you pay for, as the group also has a stronger three-year earnings compound annual growth rate of 22.3%, versus the 14.4% of regional peers.
In the long run, revenue should improve, bolstered by the group’s growing store network. Furthermore, with the slump due to GST implementation estimated to end in the third quarter of 2015, now seems a good time to get in on the stock.
For investors looking to acquire a retail sector stock for their portfolios, 7-Eleven might be one to look at. Of course, there is still some time until the recovery happens, so investors who hop in now should be prepared to hold the line for a while.
______________________________________________________________________
Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
You must be logged in to post a comment.