7-Eleven Malaysia Holding’s (SEM 5250) recently announced that it has accepted an offer from BIG Pharmacy Healthcare (BIGPH) to acquire its 75% equity stake in Caring Pharmacy Group (Caring) for a total cash consideration of RM637.5m.
On 21 Jul, SEM announced it has accepted BIGPH’s offer to buy its 75% stake in Caring for a cash consideration of RM637.5m (19.6x FY22 P/E). BIGPH’s RM637.5m offer for its 75% stake in Caring to SEM, however, excludes Caring’s loss-making Indonesia JV operations (RM1.5m net loss in 1Q23).
The disposal deal values Caring at 19.6x its FY22 net profit (close to the CY24F P/E of 20.5x CGSCIMB ascribes to the consumer discretionary sector), which the firm thinks is fair given the current competitive pharmacy retail landscape and normalising margins post Covid-19 induced demand, albeit below SEM’s 5-year mean of 26.7x and the 27x P/E multiple when it acquired Caring back in 2019.
Note that SEM has managed to double Caring’s net profit to RM43.4m in FY22 (FY19: RM20.7m) while growing its pharmacy retail store count in Malaysia to 252 at end-1Q23 from 129 when it acquired Caring in 2019.
In a note today (July 25), CGSCIMB said their analysis indicates the disposal could be earnings-accretive According to their analysis, CGSCIMB estimates the disposal of Caring to be earnings accretive for SEM and would add c.3% to our FY24F core net profit (CNP) forecast after taking into account a potential post-tax cost savings of RM27m.
The firm assumes Caring would account for 30%/25% of SEM’s total FY24F revenue/CNP. Note that Caring’s margin fell in 1QFY23 to 1.4% (FY22: 4.2%) due to sales normalising post Malaysia’s economic reopening, lower off-take of higher-margin Covid-19 related items and store refurbishment activities affecting productivity.
However, SEM expects Caring’s earnings to improve in the coming quarters. The completion of the disposal could also bolster SEM’s balance sheet, turning it to a net cash position, and add c.2% to our TP.
Sole focus on growing its convenience store segment via 7-café
CGSCIMB is positive on the disposal as it allows SEM to utilise the proceeds to solely focus on enhancing and growing its convenience store business, especially in expanding its 7-café chain (c.1.8x higher average per store day sales than its typical 7-Eleven stores, in our estimate).
Thus, it aims to open 50 new 7-café stores and refurbish more than 50 existing stores to 7-café format both in and out of Klang Valley in FY23F. The completion of its new fresh food commissary, targeted by end-2023, will also enable SEM to further bolster its higher-margin fresh food offerings across its 7-café stores from FY24F, leading to a more favourable product mix, which could bode well for its future earnings, CGSCIMB said.
Reiterate Hold with an unchanged TP of RM2.10 (26.7x CY24F P/E)
Pending completion of the deal which is subject to shareholders’ approval, CGSCIMB retains their FY23-25F EPS. Retain Hold and TP of RM2.10 (26.7x CY24F P/E, 5-year mean). Upside risk is stronger sales, while downside risk is higher-than-expected operating costs.
