Should We Take A Bite On 7-Eleven Malaysia Holdings Bhd?

7-Eleven Malaysia Holdings Bhd (KLSE: SEM) (7-Eleven) is the owner and operator of a chain of 7-Eleven convenience stores in Malaysia. In addition to retailing, it also earns commission income from offering in-house services such as bill payments, sales of mobile phone reload cards, fax and photocopying services. In this article, I’ll cover on its latest financial results and valuation figures. Thus, here are 11 main things to know about 7-Eleven before you invest:

• Store Network
  7-Eleven had expanded its store network by a CAGR of 8.3% for the last 8 years, growing from 1,212 outlets in 2010 to 2,287 outlets in 2018. Of which, 7-Eleven has 2,155 corporate stores and the remaining of 132 of its stores are run by franchisees.
  
  
  

• Group Profitability
  7-Eleven has achieved a CAGR of 5.8% in group revenues, growing from RM 1.67 billion in 2013 to RM 2.22 billion in 2018. It is attributed to the retailer’s increase in store network in the period. Since 2015, 7-Eleven’s earnings were maintained at RM 50-55 million per annum despite sales growth in the period. This is because its profit margins had eroded as a result of higher selling & distribution expenses.
  
  
  

• Cash Flow Management
  In 2014, 7-Eleven has raised RM 250.3 million from its IPO exercise. The retailer has since then generated RM 331.5 million in positive cash flow from operations and raised another RM 123.9 million in net borrowings from 2015 to 2018. From them, 7-Eleven has spent on the following for the last 4 years:
  
  – RM 256.8 million in net capital expenditures (CAPEX).
  – RM 27.3 million in net acquisition of intangible assets.
  – RM 190.6 million in acquisition of treasury shares.
  – RM 200.5 million in dividend payments to its existing shareholders.
  
  
  Hence, 7-Eleven had reduced its cash balance from RM 244.1 million in 2014 to RM 72.5 million in 2018.
  
  
  

• Balance Sheet Strength
  In Q3 2019, 7-Eleven has net debt of RM 51.2 million and a total capital of RM 219.0 million. Thus, its gearing ratio is 23%.
  
  Net debt is calculated by netting its total loan and borrowings less cash reserves. Meanwhile, total capital is equity attributable to shareholders which excludes treasury shares. Thus, the formula is as follows:
  
  Net Debt:
  = Loans and Borrowings – Cash Reserves
  = RM 139.0 million – RM 87.8 million
  = RM 51.2 million.
  
  Total Capital:
  = Equity Attributable to Shareholders – Treasury Shares
  = RM 90.1 million – (- RM 128.9 million)
  = RM 219.0 million.
  
  Net Debt
  = (Net Debt / Total Capital) x 100%
  = (RM 51.2 million / RM 219.0 million) x 100%
  = 23%
  
  
• Latest 12-Month Financial Results
  For the last 12 months, 7-Eleven has generated RM 2.32 billion in sales. From it, it had made RM 55.2 million in shareholders’ earnings or 4.86 sen in earnings per share (EPS). This is contributed to continuous rise in store networks, favourable sales mix and higher marketing income.
  
  

Period	Group Revenue(RM ‘000)	Shareholders’ Earnings (RM ‘000)	Earnings per Share (EPS) (Sen)
Q4 2018	554,263	12,485	1.11
Q1 2019	583,731	11,145	0.99
Q2 2019	588,779	14,588	1.28
Q3 2019	594,159	16,979	1.48
Latest 12-Months	2,320,932	55,197	4.86

• Major Shareholders
  As of 29 March 2019, the 5 biggest shareholders of 7-Eleven are listed as follows:
  
  

No.	Major Shareholders	Shareholdings (%)
1	Tan Sri Dato’ Seri Vincent Tan Chee Yioun	43.48%
2	DYMM Sultan Ibrahim Johor	5.07%
3	Tan Sri Kong Hon Kong	5.34%
4	Classic Union Group Ltd	18.30%
5	True Ascend Sdn Bhd	7.08%

Tan U-Ming, son of Tan Sri Dato’ Seri Vincent Tan Chee Yioun, currently is appointed as an Executive Director of 7-Eleven. Tsai Tzung-Han sits in the board as a non-executive director. Tsai is a substantial shareholder of 7-Eleven through his interest held in Classic Union Group Ltd.

• Recent Development 1: 2-Storey Shop-Office in Tropicana Aman.
  On 30 September 2019, 7-Eleven had proposed to purchase a 2-storey cornered shop-office measuring 5,253 sq. ft. in Bandar Tropicana Aman for RM 2.85 million. It intends to operate a 7-Eleven convenience store in the newly developed township.
  
  
• Recent Development 2: Acquisition of 25.35% of Caring Pharmacy
  On 28 November 2019, 7-Eleven entered into a conditional agreement with Motivasi Optima Sdn Bhd for 25.35% interests of Caring Pharmacy Group Bhd (Caring) for RM 143.5 million or RM 2.60 a share.
  
  Presently, Tan Sri Dato’ Seri Vincent Tan Chee Yioun has 13.22% interest in Caring. Upon completion, Tan Sri Vincent Tan’s interests in Caring will be increased to 38.57%.
  
  Concurrently, 7-Eleven would extend a conditional mandatory general offer (MGO) for all of the remaining shares of Caring not owned by Tan Sri Vincent Tan at a cash offer price of RM 2.60 a share.
  
  As of 31 August 2019, Caring has a network of 129 pharmacies situated in prime / high traffic locations, including shopping malls. This provides 7-Eleven immediate access to these locations and opportunities for the two entities to cross-sell multiple overlapping products such as snacks and personal care products.
  
  
  
• P/E Ratio
  As of 26 December 2019, 7-Eleven is trading at RM 1.43 a share. Thus, its current P/E Ratio is 29.42, below its 5-year average of 31.08.
  
  
  

• P/B Ratio
  In Q3 2019, 7-Eleven has net assets of 7.92 sen a share. Hence, it has a current P/B Ratio of 18.06. P/B Ratio is less meaningful for 7-Eleven has been maintaining a small equity base and runs its businesses via debt.
  
  
  
• Dividend Yields
  In 2018, 7-Eleven has paid out 5.3 sen in dividends per share, which are made up of both cash and share dividends. Hence, its dividend yield is 3.71% per annum presently.
  
  
  

VIA’s Verdict 

Over the past 5 years, 7-Eleven’s stock prices had been relatively flat, hovering at around RM 1.40 levels since its IPO in 2014. This has reflected upon a flattish EPS and DPS delivered to its shareholders during the 5-year period. 

So, is this a good time to invest in 7-Eleven at RM 1.43 a share? 

My question to you is: ‘Can you find stock deals that have delivered consistent increase in earnings and dividends, trading at below 30 in P/E Ratio and providing above 4+% in dividend yields in the stock market today?’ 

If your answer is yes, then, please continue to shop around for better deals that are available in the stock market. 

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