Thus, it comes as no surprise that consumer stocks have enjoyed a good run this year, as investors sought out stocks that are relatively defensive in nature and yet offer exposure to rising consumer spending.
Today sees the listing of Berjaya Retail Bhd (B-Retail), giving investors another choice in the consumer sector.
But is the stock an attractive one for investors?
The answer could be tricky, given the patchy track record of initial public offerings (IPOs) so far this year, and more importantly, B-Retail’s high valuations at a trailing 22 times for 2009, and around 16 to 17 times for estimated 2010 earnings, based on its IPO price of 50 sen.
B-Retail groups together Singer (M) Sdn Bhd and 7-Eleven Malaysia Sdn Bhd, brand names that need little introduction. Through 7-Eleven, the company is involved in the operation of convenience stores, while the marketing and direct selling of consumer durables with instalment option schemes is done via the Singer group.
Although the businesses of 7-Eleven and Singer are diverse, with different products and target markets, the acquisition has enabled B-Retail to consolidate the operations of carrying the “7-Eleven” and “Singer” brand names under a single group.
In B-Retail’s prospectus for the IPO, the 7-Eleven group has established a network of 1,127 7-Eleven convenience stores throughout Malaysia, while Singer has 561 branches with about 3,500 independent sales agents as at May 18, 2010.
“Our large sales network is a key competitive advantage that will provide our group with growth opportunities,” B-Retail notes.
7-Eleven is currently embarking on a programme to franchise a significant proportion of its existing convenience stores, which would translate into additional income and free up capital for reinvestment in areas such as opening new 7-Eleven stores. It has 38 outlets operated by franchisees as at May 18.
In addition, 7-Eleven has formalised a joint collaboration with Perwira Niaga Malaysia (Pernama) to offer job placements in 7-Eleven stores with the aim of increasing the number of franchisees.
Also, Singer is expanding its network by recruiting new agents to expand its reach and better serve the need of its customers. It plans to increase the number of Singer branches and sales agent shops to about 1,000 within five years.
Is there too much competition?
The convenience store business is seen as highly competitive, with 7-Eleven competing not only with other local convenience stores, but with hypermarkets, supermarkets, grocery stores, mini markets and retail outlets at petrol stations, among others.
In a recent interview with The Edge business weekly, B-Retail executive director Ng Su Onn was unfazed and said there was growth potential for the company’s 7-Eleven convenience store business.
In Ng’s view, the domestic convenience store market is far from saturated, and he cited the example of Taiwan, which has a population of 23 million people.
“There are 13,000 convenience stores in Taiwan, including 4,800 7-Eleven stores. Malaysia has a population of 28 million and fewer than 1,500 convenience stores, thus there is certainly room for expansion,” he said.
“Our target is to have 2,000 stores within five years,” which he said was feasible. According to Ng, the average sales revenue per store is about RM100,000 a month, or RM1.2 million a year.
Currently, 7-Eleven has the lion’s share of the convenience store market in the country, thanks to the government’s ban on the entry of new foreign convenience stores. Apparently, about 60% of the sales in 7-Eleven stores is generated from 7pm to 7am. Thus, 7-Eleven is not seen as competing directly with the hypermarkets and traditional sundry shops, except during normal daytime hours.
Meanwhile, Singer’s target market for white goods or electrical appliances is the middle to low-income group in rural and suburban areas. In addition, Singer provides micro consumer credit to customers who purchase its home appliances.
B-Retail executive director Yeap Dein Wah, who is also the managing director of Singer (M), told The Edge that under 15% of its sales are in cash.
The bulk of sales is on credit and paid off in instalments. “We provide easy payment schemes for our customers by charging them monthly interest of 1.5% to 1.8%, with the credit period ranging from six to 48 months,” says Yeap.
An expensive IPO?
B-Retail enjoys economies of scale from the sheer size of its operations, which is reflected in its proforma consolidated revenue of RM1.54 billion for the year ended Dec, 31, 2009 (FY09), which was up from RM1.46 billion the year before.
However, its proforma net profit in FY09 dipped 17% to RM34.45 million from RM41.65 million in FY08, with earnings per share (EPS) of 2.30 sen. Net profit margins also appear low at 2.2%.
The group is expected to embark on a dividend policy, with a payout rate of up to 50% of annual net profits.
For the past three proforma financial years up to June 30, 2010, B-Retail’s total capital expenditure amounted to about RM145 million, mainly related to the opening of 340 new 7-Eleven convenience stores and the acquisition of the exhibition hall at Berjaya Times Square shopping complex.
Based on its offer price, the company’s market capitalisation upon listing is anticipated to be about RM748.7 million.
Its net tangible asset per share stands at two sen after taking into account a merger deficit of RM690 million. Without accounting for the merger deficit, the book value per share would be 52 sen, similar to the offer price of 50 sen.
The group’s price-to-earnings ratio (PER) is also on the high side. Based on FY09 results, B-Retail would be trading at a trailing PER of 21.7 times, based on EPS of 2.3 sen.
Based on forecast FY10 earnings estimates, its forward PER would be about 16 to 17 times, depending on the forecast of research houses, which is high relative to the broader market’s 15 times as well as other consumer stocks.
Data services last Friday indicated that general retailers were trading at an average PER of 13.68 times. B-Retail’s peers, such as AEON Co (M) Bhd, Parkson Holdings Bhd and Amway (M) Holdings Bhd, are trading at a PER of 11.92, 10.36 and 17.53 times, respectively.
Kenanga Research, in an Aug 2 report, valued B-Retail at 49 sen per share, one sen lower than its offer price of 50 sen apiece. The fair value was based on 14 times PER using forecasted FY11 EPS of 3.5 sen.
“We value the group at 14 times PER, which is a discount to industry average of 16 times, given the group’s smaller operation relative to the likes of AEON, Parkson and Amway,” said Kenanga Research.
The research house said with 7-Eleven’s growth target of 100 to 150 new convenience stores a year, to hit 2,000 stores in five years, the franchise programme would provide the avenue to expand rapidly, with franchisees contributing to the capital expenditure.
It said 7-Eleven’s near-term plan to upgrade its logistics function by setting up a new dedicated, purpose-built facility on its four-acre land in Bukit Jelutong would maximise efficiency in receiving, processing and distribution of goods.
Kenanga Research also said Singer’s revised duration of credit terms of 42 to 48 months, from 36 months previously, would improve affordability. “Plans to expand its existing 561 branches to 1,000 branches in the next five years would certainly boost its market presence and enable Singer to reach out to a wider market in the suburban and rural towns,” it pointed out.
Among other research houses, RHB Research has a fair value of 51 sen for B-Retail and TA Securities has it at 53 sen. RHB has forecast the company’s EPS to jump more than 40% to 3.3 sen in FY10 and 3.7 sen in FY11. Still, this translates to a PER of 15.1 times on an EPS of 3.3 sen.
This article appeared in The Edge Financial Daily, August 16, 2010.
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