CREDIT ANALYSIS REPORT

7-ELEVEN MALAYSIA HOLDINGS BERHAD - 2021

Report ID 6053646 Popularity 124 views 48 downloads 
Report Date Apr 2021 Product  
Company / Issuer 7-Eleven Malaysia Holdings Bhd Sector Consumer Products
Price (RM)
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Rationale
Rating action     
MARC has assigned a preliminary rating of AA- to 7-Eleven Malaysia Holdings Berhad’s (7-Eleven Holdings) proposed RM600.0 million Medium-Term Notes (MTN) Programme with a stable outlook.

Rationale     
The assigned rating mainly reflects 7-Eleven Holdings' strong and established market position in the convenience store segment, gained from a long operating track record with a wide store network that has supported stable earnings generation. Moderating the rating are the prevailing competition within the convenience store segment, particularly in the urban areas, and high operating cost inherent in the convenience store business model that has weighed on operating margins.

7-Eleven Holdings is a non-operating investment holding company with two major subsidiaries: 7-Eleven Malaysia Sdn Bhd (7-Eleven Malaysia) which operates the convenience store chain under the 7-Eleven brand; and Caring Pharmacy Group Berhad (Caring Pharmacy) which operates the retail pharmacy chain under the Caring brand. Acquired in June 2020, Caring Pharmacy is expected to contribute about 31.3% p.a. to group operating profit over the next three years.

7-Eleven Malaysia has about 2,400 stores nationwide, accounting for about 64.9% of the total of number of convenience stores held by major operators. It is expected to continue its rapid pace of expansion with a target of opening 100-150 new stores annually for which it has earmarked a capex of RM70.0 million. The expansion has provided an extensive geographical reach throughout the country, further entrenching its position. Operating under a long-term exclusive license from the US-based 7-Eleven Inc, licensing risk is mitigated by its lengthy operating track record. Same-store sales growth however has weakened, partly due to the increased competition in the convenience store segment. This is being addressed by increasing product and service differentiation in its stores, and by refurbishing up to 450 others annually and shuttering underperforming stores. These efforts have resulted in improved operating margins to above 4.0% since 2019.

Caring Pharmacy has 144 stores as at end-2020, growing organically by utilising internal funds for store expansions, as reflected by a low leverage level of about 0.04x at end-2020. Capex has ranged between RM4.1 million and RM8.3 million  between 2017 and 2020  and is expected  to be maintained within this range in the medium term. 7-Eleven Holdings funded the acquisition of the 75.0%-stake in Caring Pharmacy for RM259.4 million through bank borrowings, resulting in leverage of 3.31x from 1.46x. Group borrowings stood at RM533.1 million. The high leverage position is due to a reduced equity base, which stood at RM161.2 million at end-2020, by a reorganisation deficit of RM1.3 billion which arose from a listing exercise in 2014. Without the reorganisation deficit, group leverage would be a moderate 0.35x. Operating profit before interest, tax, depreciation and amortisation (OPBITDA) interest coverage remained strong at above 5.50x. Proceeds from the initial issuances under the proposed MTN are expected to be used to refinance existing borrowings to a longer tenure.

Rating outlook     
The stable outlook assumes 7-Eleven Holdings’ operations will remain supportive of the group’s financial obligations.

Rating trajectory

Upside scenario     
Any upside in the rating would depend on a substantial and sustained improvement in leverage position.

Downside scenario     
The rating and/or outlook could be revised downwards if the group embarks on a further aggressive and debt-funded expansion.

Key strengths
  • Strong brand recognition with a long operating record since the 1980s 
  • Strong market position in the convenience store segment 
  • Entry into the growing pharmacy retail segment
Key risks
  • Stiff competition in the convenience store and pharmacy retail segments
  • High operating costs inherent for convenience store operators   
  • Capital structure weighed down by deficit from restructuring


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