CGS-CIMB Research is positive with 7-Eleven Malaysia Holdings Bhd’s proposal to dispose its pharmaceutical arm – Caring Pharmacy – which if materialises will enable the former to focus on growing its core convenience store business and strengthen its financial profile.
Having conducted a scenario analysis on the impact on 7-Eleven’s FY2023-FY2024F earnings per share (EPS), the research house estimated that the potential disposal could lift the convenience store operator’s FY2023-FY2024F’s EPS by 33%-36%.
This is assuming that (i) it receives cash proceeds of RM1.3 bil; (ii) pares down its debt entirely (interest cost savings of RM43 mil per annum; (iii) interest income of RM17 mil per annum; (iv) completion of this deal by 4Q 2022F; and (v) taking into account of Caring’s FY2023/2024F net profit contributions of RM30.7 mil/RM32 mil.
For the record, The Edge Malaysia first broke the news about 7-Eleven looking at a potential divestment of its pharmaceutical arm (Caring Pharmacy) after attracting interest from some Japanese parties, potentially valuing the entire pharmacy group at RM1.8 bil.
Assuming the potential divestment is only in exchange for cash, CGS-CIMB Research believes that 7-Eleven could receive cash proceeds worth RM1.3 bil based on its 75% stake in Caring and record a potential gain on disposal of RM1 bil (based on cost of investment of RM292 mil when it took over the company in 2020).
“At this juncture, we understand that 7-Eleven has neither confirmed or deny of the said news article published by The Edge Malaysia,” analysts Khoo Zhen Ye and Walter Aw pointed out in a company update.
Despite rising competition in the convenience store (CVS) space, CGS-CIMB Research expects 7-Eleven’s share price to be supported by its dominant position in the CVS and pharmaceutical space in terms of store count (circa 2,437 7-Eleven stores and 199 pharmacies as of end-March this year).
“Our FY2022-FY2024F EPS forecasts and “hold” call are intact. Our target price remains at RM1.48 based on 22 times FY2023F P/E (price-to-earnings ratio) which is 1 s.d. (standard deviation) below its five-year mean P/E of 31.1 times,” added the research house.
Caring Pharmacy was previously listed on the Main Market of Bursa Malaysia until its delisting on May 8, 2020 when 7-Eleven took over the company.
Since then, the number of Caring outlets has increased from circa 130 to circa 199 as of end-march 2022 through organic store expansion and the acquisition of a 67% stake in The Pill House Pharmacy (Georgetown Pharmacy) and a 60% stake in Wellings Pharmacy in 2Q 2021.
Additionally, 7-Eleven has also ventured into the Indonesian pharmacy market via a joint venture. As of end-March 2021, Caring’s customer loyalty programme has more than one million validated members and 531,000 mobile app users which is a testament to its strong customer base and operating scale.
At 10.25am, 7-Eleven was untraded at RM1.59 with a market capitalisation of RM1.96 bil. – July 20, 2022
