Convenience store players to feel the pinch


For 7-Eleven Malaysia Holdings Bhd, every 10% decline in tobacco sales would lower the group’s total revenue by 2.2%, assuming tobacco sales make up 35% of its CVS segment sales, according to the research house’s estimates.

PETALING JAYA: The government’s proposed bill to ban the sale of all tobacco products, including e-cigarettes, to people born in and after 2007 in a bid to curb smoking, will negatively impact sales of Malaysia’s convenience store (CVS) players.

The Tobacco and Smoking Control Bill 2022 was first tabled to the Dewan Rakyat on July 27. The bill will be tabled in the next parliamentary meeting scheduled to start on Oct 26. In addition to the ban of tobacco sale for people born in and after 2007, the bill also prohibit retailers from displaying tobacco products, smoking devices as well as their substitutes.

CGS-CIMB Research stated if the bill were to be approved, local CVS players would not be able to display tobacco products and smoking-related items in their stores, which could hurt their tobacco sales.

“Based on our channel checks, tobacco sales form 7% to 35% of CVS operator’s sales at this juncture.

“Nevertheless, we expect the impact on margins and bottom line to be smaller,” it said, given cigarettes are typically a low-margin sales product.

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The research house, in a report last Friday, stated a sensitivity analysis to gauge the impact of every 10% decline in tobacco sales to its revenue forecast for the CVS players, found QL Resources Bhd would be least impacted due to its well diversified business model and lowest revenue contribution from tobacco products among its peers.

Every 10% decline in tobacco sales would lower QL Resources’ total revenue by 0.1% only, assuming tobacco sales make up 6.6% of its CVS segment sales.

For 7-Eleven Malaysia Holdings Bhd, every 10% decline in tobacco sales would lower the group’s total revenue by 2.2%, assuming tobacco sales make up 35% of its CVS segment sales, according to the research house’s estimates.

However, the impact on 7-Eleven’s revenue will partly be cushioned by its pharmaceutical business segment.

MyNews Holdings Bhd would be impacted the most as CGS CIMB’s Research analysis revealed that a 10% decline in tobacco sales would lower the group’s total revenue by 3.5%, assuming tobacco sales make up 35% of its sales, and given that it generates 100% of its revenue from the CVS business.

CGS CIMB added that 7-Eleven generated 62% of its first quarter revenue for financial year 2022 (1Q22) from its CVS business and QL Resources, via Family Mart, generated only 13.4% of its FY22 revenue.

In terms of near-to-medium term impact, the research house forecast there will only be minimal earnings impact given the bill will only become effective on Jan 1, 2025 and will only affect potential smokers below the current age of 15.

Additionally, the contribution from tobacco sales has been declining for CVS operators over the past few years, given their focus towards fresh food and ready-to-eat products which generate higher margins.

“We estimate tobacco sales accounted for about 40% to 45% of CVS sales during 2017 to 2020 versus about 30% to 35%, currently,” the research house noted.

“For example, 7-Eleven and MyNews have been rolling out 7-café and CU outlets since 2021, respectively, which carry a larger proportion of higher-margin fresh-food items,” the research house added.

Therefore, CGS-CIMB Research believes that CVS operators will continue to focus on other higher-margin products which could offset the potential loss of tobacco sales in the longer term.

The research house retained its “neutral” call on the retail sector, with QL Resources’ as its preferred pick.

It made no changes to its earnings estimates for the abovementioned companies, pending further updates on the outcome of the bill.

CGS-CIMB Research has an “add” call on QL Resources owing to its diversified business model and its exposure to the CVS space via 300 FamilyMart outlets.

It has a “hold” and “reduce” call on 7-Eleven and MyNews, respectively.

“In 7-Eleven’s case, we believe the weaker operating environment amidst intensifying competition in the CVS space and risks from its high gearing have been priced in given the stock is trading at a 29% discount to its five-year mean of 31.1 times,” it said.

“For MyNews, we maintain our “reduce” call given its loss-making position due to longer gestation period for its CU segment on elevated operating expenses,” it noted.

MyNews operates two CVS brands in Malaysia, namely myNEWS and CU outlets.

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