MARC Ratings has affirmed its AA- rating on 7-Eleven Malaysia Holdings Berhad’s (7-Eleven Holdings) RM600.0 million Medium-Term Notes (MTN) Programme with a stable outlook. 

The rating affirmation reflects 7-Eleven Holdings’ entrenched market position in the domestic convenience store segment, long operating track record, and healthy debt and liquidity coverage which has been strengthened by the disposal of Caring Pharmacy Group Berhad. These strengths are counterbalanced by thin operating margins, and growing competition in the domestic convenience store segment that necessitates continued investments. 

Operating under a long-term exclusive licence, expiring in 2033, from the US-based 7-Eleven Inc., 7-Eleven Malaysia Sdn Bhd (a wholly-owned subsidiary of 7-Eleven Holdings) started domestic operations in 1984. 7-Eleven Malaysia had 2,581 stores nationwide as at end-March 2024 (end-2023: 2,566 stores) and expects to have 2,636 stores by end-2024. MARC Ratings views positively 7-Eleven Malaysia’s extensive store network — the largest among players in the domestic convenience store segment — supported by continued upgrades to adapt to fast-changing consumer preferences. This is reflected in the increased rollout of 7-Café format stores, first introduced in late 2021, which focus on ready-to-eat (RTE) products. As at end-March 2024, it had 305 7-Café format stores, up from 247 as at end-2023, and is expected to open another 212 stores by end-2024 mainly through converting existing stores.

The rating agency notes that the planned capex of RM896.1 million for 2024-2026, mainly to fund store openings and upgrades, is expected to be largely funded via internal funds — this includes part of the RM666.2 million proceeds received from the disposal of its 75% stake in Caring Pharmacy in December 2023. Group borrowings are expected to decline to RM449.5 million as at end-June 2024 from RM737.4 million as at end-2023, and consolidated debt-to-equity (DE) ratio is expected to improve to 0.26x from 0.43x (adjusted to exclude reorganisation deficit). The rating agency does not expect any significant increase in borrowings over the near term given 7-Eleven Holdings’ considerable cash balances from the remaining unutilised proceeds from the disposal of Caring Pharmacy. 

For 1Q2024, group revenue increased by 4.3% y-o-y to RM684.2 million, driven by higher customer count at its expanded store base and improving product mix. Operating profit remained flat at RM35.1 million on account of increased store operating expenses, in line with longer overall operating hours and workforce expansion, chiefly for its 7-Cafés. Given the margin pressure, MARC Ratings expects financial performance improvement through sales growth, particularly from the rollout of 7-Café stores which would account for 20% of total store count by end-2024 (current: 12%). The rapid rollout of this store format, which generated 1.5x sales compared to its standard format stores in 2023, would drive revenue growth going forward.

For 2023, the group recorded low pre-tax profit of RM21.6 million primarily due to: (1) higher store operating expenses from an enlarged store base and longer average operating hours of 21.7 hours (2022: 19.3 hours); (2) full-year impact of the minimum wage revision effective May 2022, of around RM30 million; (3) RM12.4 million in one-off impairments mainly related to its joint venture pharmacy operations in Indonesia; and (4) around RM17 million in interest costs from the acquisition of Caring Pharmacy in March 2020, which was largely debt-funded. 

The stable outlook reflects 7-Eleven Holdings’ operational and financial performance that would remain broadly in line with expectations.

Any upside to the rating would be driven by evidence of sustained improvement in key financial metrics and balance sheet structure. The rating could be revised downwards on changes in balance sheet structure, particularly with any undertaking of sizeable debt-funded acquisitions without any commensurate earnings accretion.