7-Eleven makes another attempt to list on Bursa Malaysia

by **Cals** Mon 20 Jan 2014, 01:35

Published: Saturday January 18, 2014 MYT 12:00:00 AM
Updated: Saturday January 18, 2014 MYT 11:18:13 AM
7-Eleven makes another attempt to list on Bursa Malaysia
BY JOHN LOH
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AFTER getting canned in November, will the initial public offering (IPO) of Berjaya Corp Bhd’s 7-Eleven franchise be third time lucky?
At first glance, the listing structure is not much different from what was proposed last year, according to the draft prospectus for the more aptly-named 7-Eleven Malaysia Holdings Bhd (formerly Seven Convenience Bhd).
The IPO will offer up to 530.33 million shares for sale on the Main Market of Bursa Malaysia, of which 348.94 million shares come under the offer the sale portion and 181.39 million are new shares.
Institutional investors have been allocated 490.78 million shares, and retailers 39.55 million shares.
The pricing of the IPO, and therefore its gross proceeds, is not yet known, but sources say the deal size will be smaller than the RM750mil that Seven Convenience had initially targeted to raise last year, amid more modest valuations.
Other details have been tweaked, such as the utilisation of proceeds. The bulk of the money at 86.3% is now earmarked for capital expenditure (capex) from 67.9% previously, while the portion for working capital has been reduced to 3.5% from 24.2%. The remaining 10.2% will be used to defray listing expenses.

Kenanga in the fray
The draft prospectus also shows that standalone investment banking house Kenanga has joined the fray as principal adviser, bookrunner and underwriter alongsideMaybank Investment Bank, which had originally secured the IPO mandate for Seven Convenience together with CIMB Investment Bank, CLSA, and UBS AG.
Industry executives say Kenanga was brought in as the clients were pleased with its handling of Caring Pharmacy Group Bhd’s listing, which was one of two spinoffs from the Berjaya group in 2013.
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Seven Convenience was to have made its debut last December, but got held back after it could not justify its valuations, StarBiz reported in November.
Although the exact reasons for the rejection of Seven Convenience’s application are unknown, it is believed the selling shareholder could not sufficiently account for the higher value of the 7-Eleven business, following its privatisation in 2011.
Sources say Seven Convenience had sought a flotation at a lofty 30 times historical earnings, a valuation the regulators might have found hard to stomach.
In situations where companies that had been privatised are being brought back to the market via an IPO, the rules dictate that issuers must provide strong justifications for boosting the value its assets. The same had been required of Astro Malaysia Holdings Bhd when the pay-TV giant relisted in 2012.
The Securities Commission’s (SC) move sparked debate about whether the regulator had overstepped its boundaries by pulling the brakes on what should be a market-driven process.
“This sort of thing is ideally determined by the market, but because bankers tend to put the interests of their clients first, the SC is doing its job to ensure minority investors are not sidelined,” says a financier.
The timing also proved unfortunate, as any delay would have thrust the IPO squarely into the year-end holiday season, which is why the new draft prospectus re-emerged only last week.
If successful, this would be 7-Eleven Malaysia’s third outing as a listed concern.
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It first became part of a listed group in 2001 when it was bought over by Berjaya Corp from Antah Holdings Bhd. A restructuring in 2004 put 7-Eleven Malaysia into the hands of Intan Utilities Bhd, but the latter was delisted in 2007 at a price-to-earnings (PE) multiple of 15.8 times.
By June 2010, 7-Eleven Malaysia found its way to the market again in the form ofBerjaya Retail Bhd bundled with home appliance brand Singer. 7-Eleven Malaysia had then crossed the 1,000 store mark.
Just nine months later in March 2011, Berjaya Corp, citing Berjaya Retail’s poor share price, took it private at 65 sen per share. The offer valued Berjaya Retail at 18.6 times earnings, lower than the 21.7 times at which it had been listed.

Dwarfing the competition
Despite these hiccups, 7-Eleven Malaysia has a compelling investment case, say market observers.
It is the country’s largest operator of convenience stores (C-store) with 1,542 outlets across Peninsular Malaysia, Sabah and Sarawak, and a reach of 800,000 customers per day. The firm owns 1,376 of its stores, while 166 are managed by franchisees.
The first standalone 24-hour C-store to open in Malaysia, its market share now stands at 82%. With a formidable network of stores, 7-Eleven Malaysia is 10 times bigger than its closest competitor and has more outlets than the combined total of the three largest C-store chains after 7-Eleven Malaysia.
The draft prospectus notes that Malaysia is under-penetrated in terms of C-stores relative to the region, with only 131 outlets per one million people, versus 192 outlets per one million people in Thailand, 340 in Japan, 429 in Taiwan and 490 in South Korea.
Besides the economies of scale from its integrated supply chain and centralised backend functions, 7-Eleven Malaysia has a strong parent in Berjaya Corp, with which it is collaborating on current and future projects.
Not only that, 7-Eleven Malaysia has more bargaining chips to ask for better rental rates in third party locations, like malls, as it can set up multiple retail sites at one go with the other consumer brands under the Berjaya stable.
7-Eleven Malaysia also says it is developing a “private label” for fast-moving items such as personal care products and beverages to be rolled out this year. Like its proprietary “Big Gulp” and “Slurpee” iced drinks, the firm expects its new private label product to deliver higher margins.
The company plans to spend RM352mil in capex over the next three years to expand its store network and undertake refurbishments, as well as upgrade its IT system and build a new combined distribution centre.
The C-store chain aims to accelerate its store roll-out to a net increase of 600 stores between 2014 and 2016, bringing its store count to well over 2,000 by end-2016.
It is worth noting that 7-Eleven Malaysia has suspended for the time being its franchise model due to poor returns, and the firm does not plan to enter the Brunei market at present despite holding the licence to do so.
On the backend, 7-Eleven Malaysia wants to construct a new 166,000 sq ft central distribution centre in Shah Alam to replace the existing 90,000 sq ft facility by the end of next year.
The idea is to raise the centre’s handling and distribution capacity to 75% of all inventory in Peninsular Malaysia from 53% currently.
Also in the pipeline is what it calls the “put away” inventory management system, which will allow store orders to be centrally consolidated at the distribution centre, streamlining the lead time for delivery to between one and two days from five days.
Still, margins are razor-thin, which makes 7-Eleven Malaysia particularly susceptible to swings in operating costs. It doesn’t help that the mass market, its main customer, is a price-sensitive one.
And this is saying nothing of the competition. G Ekspres, a new mini-mart linked to Giant hypermarket, is reportedly eyeing an aggressive expansion of up to 500 outlets by 2018.
In terms of costs, 7-Eleven Malaysia’s cost of sales and selling and distribution expenses eat away a substantial chunk of its topline, its accounts show. But to its credit, the firm has kept a lid on its cost of sales, which grew only 5.91% on a compounded basis between 2010 and 2012, against 6.33% for revenue.
It achieved an impressive gross profit margin of 26%-27% for the three years through 2012, but after tax margins were only 2%-2.6%.
Earnings-wise, its profit after tax rose at a three-year compound annual growth rate of 14.05%, backed by an ever-growing network of stores.
For the nine months to September 30, 2013, 7-Eleven Malaysia posted a 18.61% increase in profit after tax to RM36.64mil from RM30.89mil the year before, giving the firm its best after tax margin since 2010 of 2.93%.
A market observer says 7-Eleven Malaysia is a cash cow given its healthy cashflows.
Investors may also find comfort in its dividend policy. The company says it will commit to a payout of between 30% and 50% of distributable income.

Another BAuto?
A fund manager tells StarBizWeek he isn’t perturbed by the various privatisations that 7-Eleven Malaysia has undergone over the years.
“The market had failed to appreciate it in the past as the business was not yet mature,” he says.
Nonetheless, he laments that the Berjaya group tends to be tight-fisted with allocations for fund managers, as seen with the IPOs of Caring Pharmacy and Berjaya Auto Bhd, which he says were mainly placed out to associates of the group.
A source familiar with the matter, however, tells StarBizWeek that both those listing were smaller than 7-Eleven Malaysia.
“The portion for institutions this time should pacify disgruntled fund managers,” the source explains.
Another investment manager thinks the recent spate of IPOs from the Berjaya fold do little to quell investor concern that its ultimate shareholder may be cashing out.
Post-listing, Berjaya group founder and Malaysia’s ninth richest man Tan Sri Vincent Tan will continue to hold a controlling 57% of 7-Eleven Malaysia.
And although the valuations for the IPO have yet to be finalised pending the bookbuilding process, the draft prospectus indicates a PE range of 12.54 times to 57.36 times, but below the average of 40.59 times for comparable companies in emerging markets, including Thailand, Indonesia and the Philippines.
Perhaps topmost on investors’ minds is whether 7-Eleven Malaysia can repeat the first-day success of Berjaya Auto, which opened at more than double its IPO price on gong day.
A fund manager says he isn’t holding his breath. “It all boils down to the valuations,” he quips.