CREDIT ANALYSIS REPORT

7-ELEVEN MALAYSIA HOLDINGS BERHAD - 2022

Report ID 605389004708 Popularity 687 views 98 downloads 
Report Date May 2022 Product  
Company / Issuer 7-Eleven Malaysia Holdings Bhd Sector Consumer Products
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC Ratings has affirmed its rating of AA- on 7-Eleven Malaysia Holdings Berhad’s RM600.0 million Medium-Term Notes (MTN) Programme with a stable outlook. The outstanding under the programme stood at RM500.0 million as at end-February 2022.

Rationale     
The rating incorporates 7-Eleven Holdings' established market position and strong operating track record in the domestic convenience store segment, and the strong growth prospects for its pharmacy retail segment. Moderating the rating is the thin operating margin and increasing competition for both its segments.

7-Eleven Holdings has two key subsidiaries: 100%-owned 7-Eleven Malaysia Sdn Bhd which operates the 7-Eleven convenience store franchise through 2,427 stores nationwide currently; and 75%-owned Caring Pharmacy Group Berhad (Caring Pharmacy) which operates 191 retail pharmacy outlets domestically. 7-Eleven Malaysia has a commanding market share in terms of store count with an extensive reach that also covers suburban and rural areas. This provides a competitive edge over its peers that have lower presence in these areas. Its store count expansion slowed in 2021 with a net increase of 14 stores as compared to an average annual net increase of 96 stores in 2017-2019, due to the impact of the COVID-19 pandemic. For 2022, store expansion is expected to rebound to a net increase of 70.

MARC Ratings notes that 7-Eleven Malaysia has increased focus on product and service differentiation strategy which includes setting up café format 7-Café at some of its key store premises, and refurbishing and shuttering underperforming stores. It expects to open 150 7-Café stores by end-2022. It has earmarked RM224.7 million for capex programme in the near term. 7-Eleven Malaysia operates under a long-term exclusive license from the US-based 7-Eleven Inc that expires in 2033; licensing risk is mitigated by its established and lengthy operating track record.

Its retail pharmacy Caring Pharmacy plans to expand by an additional 20-25 outlets in the near term from the current 191 outlets as at end-2021 (end-2020: 144 stores) to capture the increasing demand for healthcare products and services. The pharmacy group has completed the acquisition of The Pill House Pharmacy Sdn Bhd (operates Georgetown Pharmacy) and Wellings Pharmacy Sdn Bhd (operates Wellings) for  about  RM49 million  in January 2021. Caring Pharmacy will expand to secondary towns where it has minimal or no presence, and where it is likely to benefit from improved healthcare awareness. Compared to 7-Eleven Malaysia, Caring Pharmacy’s capex programme plan is relatively modest, estimated at RM9.7 million in 2022 and RM6.0 million in 2023.

7-Eleven Holdings’ group revenue increased by 10.6% y-o-y to RM2.8 billion in 2021, of which Caring Pharmacy accounted for 35.5%, which helped offset sales decline in the convenience store segment that was affected by shorter operating hours during the intermittent movement restrictions periods. Group operating profit margin improved to 5.5% (2020: 4.6%), supported by the higher margin in its pharmacy retail business and cost management strategy. Going forward, group performance is expected to improve as its convenient stores will resume 24-hour operations. For the pharmaceutical segment, the growth will be anchored by positive retail sales outlook and continued consumer focus on healthcare.

7-Eleven Holdings’ leverage stood at a moderate level of 0.42x as at end-2021, excluding the reorganisation deficit of RM1.3 billion upon listing in 2014. Group borrowings stood at RM640.2 million including the outstanding RM500.0 million programme under the MTN programme. Cash balance stood at RM199.5 million as at end-2021. 7-Eleven Malaysia benefits from the nature of its cash business and has recorded negative conversion cycle for the last five years. Cash flow from operations interest and debt coverages stood at 5.59x and 0.18x as at end-2021.

Rating outlook     
The stable outlook assumes 7-Eleven Holdings’ operations and credit profile will remain broadly aligned to the rating band.

Rating trajectory

Upside scenario     
Any upgrade to the rating and/or outlook would depend on a sustained improvement in its financial performance and balance sheet structure.

Downside scenario     
The rating and/or outlook could be revised downwards if the group embarks on aggressive debt-funded acquisitions without any immediate earnings accretion and/or divestments of subsidiaries that can impact the financial performance of the holding company.

Key strengths
Strong brand recognition with a long operating record
Entrenched market position in convenience store segment
Benefits from Caring Pharmacy’s strong growth prospects 

Key risks
Thin margins for convenience store segment due to high operating costs
Increasing competition in convenience store and retail pharmacy segments


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