Shares up on some positive changes in the retail chain operator
A FAIR bit of changes have been taking place at 7-Eleven Malaysia Holdings Bhd.
Despite not having a single “buy” call by analysts on Bloomberg’s poll, 7-Eleven’s shares have risen by 29.14% at RM1.47 on Aug 3, from July 24’s closing price of RM1.14.
It also saw a significant shareholding change, with the entry of Johor Sultan, who emerged as the second largest shareholder with a 8.4% stake, presumably after acquiring the shares from entities controlled by tycoon Tan Sri Vincent Tan Chee Yioun, the largest shareholder of the company.
Notably, there have also been management changes, with the most recent being the resignation of executive director and chief executive officer Gary Thomas Brown on July 31, 2017, due to personal reasons. Brown has been with the company for over three years.
Ho Meng, who was previously the non-executive director, took over from Brown on Aug 1 and is now the acting CEO of the company.
Although 7-Eleven has one of the highest price-earnings valuations among its regional peers and pays out among the lowest dividends, 7-Eleven’s management believe there is much more unrealised potential to grow and that its market capitalisation trails its peers.
Executive director and deputy chief executive officer Hishammudin Hassan concedes that 7-Eleven, compared with its regional peers in Thailand, Japan and Taiwan, is barely scratching the surface in terms of convenience.
“With 7-Eleven’s current market cap of RM1.5bil and 2,200 stores nationwide, the penetration in the local market is still relatively low at this point.
“Therefore, the potential to grow and increase the number of stores still exists. But we will be selective in the areas,” he tells StarBizWeek.
According to Hishammudin, the changing consumer lifestyle and needs as well as stiff competition in the market has compelled 7-Eleven to be aggressive in expanding the company and it has since put in place a strategy that would lead to robust growth.
With a market share of 80% at present, the single-largest convenience store chain operator in the country has been refurbishing some of its stores and has to-date spruced up about 600 stores in the last three years. It has also opened 200 stores a year over the same period.
Hishamuddin reveals that the company’s strategic plan involves three main pillars – operations, cost and commercial – and these will be supported further by human resources and information technology (IT) in its efforts to build a strong organisation.
“IT is critical and here we have spent a huge amount on SAP and ERP, an IT platform that we would be leveraging on. This will enable us to be leaner and redeploy our people to our stores to be a low-cost retail chain operator,” he says.
In terms of operations, 7-Eleven launched a “Back to Basics” programme in June to strengthen end-to-end supply chain operations, with the aim to manage cost efficiently and deliver better products.
On the commercial end, the company is ramping up its e-commerce platform to have more in-store services, which include top-ups for Touch and Go, mobile phone reloads and utility bills payment.
“These in-store services already account for about 3% of 7-Eleven’s revenue and about 12% of gross profit,” he reveals.
Essentially, 7-Eleven’s payments partner Money Online or MOL has been instrumental in the company’s e-commerce offering as it is now able to implement more in-store services. In May, the company launched Alipay mobile wallet acceptance to attract more Chinese tourists to shop at its convenience stores.
That said, with the bigger plan to make a difference, he reveals that 7-Eleven is also in the midst of improving food services to include cost-effective meals for the man on the street.
On the rights issue that 7-Eleven aborted in June, Hisham said the company decided to scrap it because the timing was not right, after reviewing its strategy. The rights issue to raise up to RM61.67mil was aborted a month after announcing the proposed corporate exercise.
Meanwhile, at a recent investors’ briefing by Berjaya Assets Bhd (BAssets), its executive director Koh Huey Min said that 7-Eleven Malaysia was still undervalued in terms of market value.
“The market size and number of stores of industry peers in Thailand, China and Taiwan are more than double the size of Malaysia’s,” said Koh.
As of July 28, BAssets, via its unit Sublime Cartel Sdn Bhd, has a 3.95% stake or 43.9 million shares in 7-Eleven.
And Vincent Tan’s block of shares in BAssets include 39.4% direct and 26.99% indirect interests.
“There is a lot of upside for 7-Eleven as Tan Sri Vincent sees it. Being the entrepreneur he is, he has always had that foresight and it has been proven many times.” Koh conceded.
Trimming the fat
Valuation wise, an analyst thinks that 7-Eleven’s valuations are rich relative to its regional peers such as Thailand’s CP All Plc, Japan’s Family Mart and Taiwan’s convenience stores.
“These regional peers have a forward PE ratio of 24 to 25 times and forecast to have three-year earnings growth in the double digits,” notes the analyst.
CIMB Research analyst Kristine Wong maintained a “reduce” rating on 7-Eleven, remaining to stay on the sidelines for now as the research firm waits to see successful implementation of 7-Eleven’s “Back to Basics” programme.
Although it lauds the management efforts to boost cost efficiencies, Wong says 7-Eleven still has several negative factors that weigh on its earnings.
“7-Eleven has been reporting negative same-store sales growth over the past two years, mostly due to the implementation of its Integrated Retail Information System (Iris) since May 2016, which disrupted its retail processes.
“What was supposed to be a six-month cutover and transition to the new Iris IT system translated into inventory build-up at store level (overstock of certain products) as well as ineffective execution of the new IT system.”
Nevertheless, Wong says the company hopes to bring down costs over the next 18 months and is aiming to be the lowest cost operator in the industry.
Additionally, the company has internally benchmarked itself against industry peers in Taiwan, Japan and Thailand and is working towards employing similar business model, she explains.
Wong’s report also indicated that the group has identified RM13mil worth of inventory costs to be recovered and returned to suppliers (of which RM7mil worth has been recovered since early July 2017).
In the meantime, the convenience store chain is targeting its warehouse to break even by end-2017. It is also looking into the viability of increasing its warehouse charges imposed on suppliers, notes Wong.
“Our earnings estimates and reduce call remains intact with an unchanged target price of RM1.13 based on 24 times calendar year 2018 PE, which is in line with the regional peer average.
“The group’s financial year 2017 (FY17) and FY18 forecast valuations remain rich at 29 times/26 times in relation to its modest three-year net profit compounded annual growth rate of 8%,” according to Wong.
The upside risks for the retail chain operator include faster-than-expected recovery in consumer spending and better-than-expected execution of its cost savings programme.
Share of 7-Eleven closed unchanged at RM1.40 yesterday.