Analysts are positive on the proposed acquisition and see earnings accretion for 7-Eleven from the deal.
As the acquisition price is also done at 27 times price earnings (PE) multiples, which is lower than 7-Eleven’s PE of 32 times, analysts find this palatable.
“Caring offers inroads into a growing retail pharmacy and personal goods market, which 7-Eleven has no presence in. The acquisition could enhance 7-Eleven’s net profit by RM13.5mil per annum assuming low borrowing costs, ” said Maybank Investment analyst Jade Tam, who is maintaining her “hold” call on 7-Eleven pending the completion of the acquisition.
Even without the Caring acquisition, 7-Eleven has been turning around and has seen its numbers improve as a result of efficiency gains and better sales from new products, ” said one consumer analyst analyst.
7-Eleven has some 2,300 outlets and has been consciously trying to diversify its sales from tobacco and has brought in exclusive food and beverage products in a bid to improve margins and sales.
The numbers show that this strategy has been working.
“For the third quarter to Sept 30,7-Eleven’s net profit was more or less flat at RM16.98mil from RM16.76mil in the same quarter of the previous year. Revenue improved to RM594.16mil from RM568.52mil.
Nonetheless for the nine-month period, net profit was RM42.71mil from RM38.82mil previously. Revenue improved to RM1.77bil from RM1.67bil previously.
“We are seeing positive same store sales growth currently, and it’s always been negative in the past. While 7-Eleven has been delivering flattish growth in financial year 2017 (FY17) and FY18, we are expecting growth from this year and next, not just from efficiencies, but also sales growth, ” said the consumer analyst.
“We expect 7-Eleven to benefit from several business synergies such as product cross-selling opportunities, consumer reach expansion in relation to its store network and product offering, and economies of scale in the back-end operations, and access to Caring’s existing e-commerce platform to drive online sales, ” said Tam.
Caring Pharmacy has been the target of foreign investors in the last few years, likely due to its strong distribution network and growing profitability.
In early 2018, it attracted the interest of a South Korean firm. Subsequently, a Japanese party also showed interest in buying a strategic stake in Caring Pharmacy.
Caring Pharmacy is a specialised retail chain with a growing presence in the most populated areas in Peninsular Malaysia.
It has 132 outlets nationwide, with plans to expand its outlets to 200 by 2024.
From FY16 to FY19, Caring’s net profit has grown by a compounded growth rate of 29.77%.
For its first quarter ended Aug 31,2019, it recorded a net profit of RM4.2mil over revenue of RM163mil.
Successful digital strategy
Caring also has a successful digital strategy. Its online monthly transactions more than doubled from June 2018 to May 2019, while its mobile application has close to 390,000 members.
Last month, 7-Eleven’ wholly owned subsidiary Convenience Shopping (Sabah) Sdn Bhd and persons acting in concert (PACs) proposed a conditional mandatory general offer (MGO) for Caring Pharmacy Group Bhd for RM2.60 per share.
This values Caring Pharmacy at RM566mil.
The MGO will be triggered after Convenience Shopping and PACs complete the acquisition of a 25.35% stake in Caring Pharmacy from Motivasi Optima Sdn Bhd for RM143.5mil or RM2.60 per share, which will bring their shareholding in Caring Pharmacy to 38.57% from 13.22%.
Motivasi Optima’s stake in Caring Pharmacy will then be reduced to 25%.
The PACs are 7-Eleven, Tan Sri Vincent Tan Chee Yioun, Jitumaju Sdn Bhd and U Telemedia Sdn Bhd.
Convenience store chain 7-Eleven intends to maintain Caring Pharmacy’s listing status on the Main Market of Bursa Malaysia subsequent to the MGO.
The proposed acquisition will be funded by a combination of bank borrowings and internal funds.
The convenience store chain said it was undertaking the proposed acquisition for several reasons: an immediate expansion of network and reach of stores and product range through the combined operations; immediate access to a fully operational and profitable pharmacy business; opportunities to cross-sell products from both groups of companies; expansion into e-commerce and expected economies of scale and synergies from the operational optimisations.
The proposals are expected to be completed in the first half of next year.
The benefits of owning Caring Pharmacy are obvious at first glance.
Within the retail sector, the pharmacy and personal care subsector have been recording the highest growth when compared to hypermarkets, supermarkets, departmental stores and specialty stores among others over the last few quarters.
While Malaysia’s retail industry growth slumped to 1.8% in the third quarter of 2019 from a 6.7% growth in the same quarter last year, the pharmacy and personal care subsector delivered an 8% growth, and is expected to deliver a 9.6% growth for the October-December period, said Retail Group Malaysia.
The pharmacy sector recorded a growth of 11.8% and 14.2% in the first and second quarter of this year.
Secondly Caring Pharmacy is considered one of the most valuable brands among community pharmacies in Malaysia.
In a report entitled “State of Malaysia Community Pharmacy 2019”, the Malaysian Pharmaceutical Society stated that the top ten pharmacy brands in the country – based on Group A Poisons licence holders, operate a total of 608 outlets and that they include Caring Pharmacy, Watsons Pharmacy, Guardian Pharmacy, Alpro Pharmacy, Health Lane Pharmacy and BIG Pharmacy.
There are some 2,300 community pharmacies as at end 2018, out of which 1,625 are independent and 746, are chain outlets.
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