PETALING JAYA: 7-Eleven Malaysia Holdings Bhd (SEM) is expected to focus and grow its convenience store business following the proposed disposal of its retail pharmacy business.
Last week, SEM received an offer from BIG Pharmacy Healthcare Sdn Bhd to acquire its entire 75% equity interest in Caring Pharmacy Group Bhd for RM637.5mil.
Although SEM has not shared its plans on the utilisation of disposal proceeds, Maybank Investment Bank (IB) Research expects SEM to heighten its focus on its convenience store business, particularly on converting more existing 7-11 outlets to 7-Cafe formats to unlock better store product mix and higher footfall from its fresh food offerings.
“There are 138 7-Cafe stores as at end-May 2023.
“SEM targets to open 50 new 7-Cafe stores and refurbish 122 existing stores into 7-Cafe formats in its financial year 2023,” the investment bank noted in a report.
Maybank IB Research added the disposal of Caring at a price-to-earnings ratio (PER) of 19.6 times its past year’s earnings would decrease its overall value.
It pointed out the acquisition price for Caring is lower than SEM’s PER of 31.3 times for the financial year 2022 and SEM’s previous acquisition multiple of 27 times when it bought a 25% equity interest in Caring in 2019.
Moreover, the brokerage believes this transaction would have no significant impact on SEM’s earnings.
“Based on our estimates, assuming an interest cost savings rate of 3%, this disposal is earnings neutral to SEM after stripping out Caring’s estimated net profit contribution to the group,” Maybank IB Research noted.
Meanwhile, Kenanga Research has a more positive stance on the disposal as it sees little synergy between SEM’s convenient story operation and retail pharmacy business.
Additionally, it noted there has been no recurrence of super profits from the retail pharmacy business after the Covid-19 pandemic.
“We believe SEM will be better off redeploying its capital and resources towards growing its convenient store business,” Kenanga Research stated.
In the absence of Caring Pharmacy’s sales, Kenanga Research cut its FY24 top line forecast for SEM by 54%.
However, the research outfit highlighted the impact on SEM’s bottom line will be lower, with only a 5% reduction, as Caring’s gross profit margin of 19% is lower than the 31% in SEM’s convenience store business.
“The disposal proceeds will turn SEM’s net debt and net gearing of RM435.5mil and 2.9 times as at end-March 2023 to a net cash of RM182.3mil,” it added.
Kenanga Research maintained an “outperform” call on SEM but has raised its target price (TP) for SEM by 9% or 21 sen to RM2.59 per share.
Maybank IB Research, on the other hand downgraded SEM to a “sell” from “hold” previously, as it believes the run up in SEM’s share price has been overdone.
It, however, maintained a TP of RM1.90 per share for SEM.
SEM shares closed at RM2 a share yesterday, 20 sen or about 9% down from its previous close of RM2.20.