7-Eleven Malaysia prices at top of range

Limited allocation ensures strong institutional demand as IPO prices at M$1.38, raising M$732 million.

7-Eleven Malaysia Holdings Berhad raised M$732 million (US$227 million) on Friday after pricing its initial public offering of shares at the top of its M$1.33 to M$1.38 targeted range.

The institutional order book was more than 12 times oversubscribed early in the bookbuild, but that was not surprising since only 8% of the base 530.2 million-share-deal was earmarked for institutional investors.

The fact there was so little paper on offer for institutions - only $50 million - pushed the final share price up, bankers close to the deal told FinanceAsia. "There was very little stock to go around and it was a massively oversubscribed transaction," one banker said. Estimates were that it was oversubscribed by 20 times.

The book was fairly evenly split between long-only institutional investors and hedge funds. The majority - nearly 80% - were in Asia, with the remainder split between Europe and the US.

That included eight cornerstone investors – AIA Group, UOB Asset Management Malaysia, York Capital Management, Matthews International Capital Management, Macquarie Funds Management, Albizia Asean Opportunities Fund, Genesis Investment Management and Capital Research & Management. These will account for 24.8% of the enlarged share capital and are not subject to a lock-up.

The remaining shares are split between a Malaysian tranche, equating to 11.5% of the enlarged share capital, and a retail tranche accounting for a further 3.2%.

The deal has a primary/secondary split of 34.2% and 65.8%. The selling shareholder was Berjaya Retail Berhad, controlled by founder Tan Sri Vincent Tan.

In total, the company is offering 43% of its enlarged share capital, which could be bumped up by a further 6 percentage points if a greenshoe option is exercised.

Punchy valuation?

At the top end of the range, the deal has been priced at 33 times 2013 earnings, which is high relative to comparable Malaysian companies but cheap relative to other listed 7-Eleven franchises in Asia.

Closest to home is CP All, the Charoen Pokphand subsidiary, which holds the 7-Eleven franchise in Thailand. Its shares are currently trading at around 37 times 2013 earnings and are flat year-to-date.

In contrast, Philippine Seven Corp's shares are trading at a far higher price-earnings ratio of 66.8 times 2013 earnings. But they are also pretty much flat so far this year.

The broader Malaysian stock market is currently trading at 17.6 times 2013 earnings, close to its long-term average, while other local consumer stocks such as superstore operator Aeon Holdings Berhad are averaging about 21 to 23 times 2013 earnings.

Growth outlook

7-Eleven Malaysia already has a dominant presence in Malaysia, with an 82% share of the convenience retail store market and 1,583 stores spread throughout the Peninsular and East Malaysia. Yet the company maintains that its growth prospects remain promising, underpinned by the fact the convenience store segment in Malaysia is still relatively underpenetrated.

According to a report by Vital Factor Consulting, Malaysia only has 131 million stores per million of the population compared with 192 in Thailand (where CP currently has 7,041 stores) and South Korea with 490 stores.

About half of 7-Eleven Malaysia’s current Malaysian stores are also in the Klang Valley, which surrounds Kuala Lumpur. Over the next two years, the group intends to add a further 600 net new stores, mainly in East Malaysia.

Quite a significant chunk of the IPO proceeds will be used for store refurbishment, which the group hopes will increase sales by 10% to 15%. It also plans to equip its new stores with wireless networks in an effort to attract a younger crowd and aims to boost its profitability with more focused promotions and by increasing in-store services such as bill payments.

7-Eleven Malaysia’s in-store services segement has been growing at a compound annual growth rate of 16% and has been having a positive impact on its bottom line, making a 3.4% contribution to its 2013 revenues but 12.7% of its gross profit margin. Overall, the company’s gross margin stood at 27.93% in 2013 and has been rising since 2010 when it stood at 26.07%.

Company financials

7-Eleven Malaysia has recorded a steady rise in revenue and income for the past four years. Revenue totaled M$1.67 billion in 2013, compared with M$1.58 billion in 2012, M$1.46 billion in 2011 and M$1.31 billion in 2010.

Net income, meanwhile, hit M$51.8 million in 2013, a 28% rise from M$40.5 million in 2012, and substantially better than the M$29.7 million and M$27.3 million seen in 2011 and 2010, respectively.

Average per capita income in Malaysia is forecast to grow at a rate of 10.7% from 2013 to 2015, adding weight to the company’s growth ambitions – increasing consumer affluence leads to more spending across all retail segments, including convenience store chains.

The 7-Eleven Malaysia deal is also seen giving the Malaysian IPO market a much-needed boost and is the country's largest floatation since UMW Oil & Gas raised $740 million in 2013.

So far this year, Malaysian issuers have raised $2.4 billion in IPOs, follow-ons and equity-linked offerings, almost half the $5.2 billion raised in 2013 but still a far cry from the $11.9 billion raised in all of 2012, according to Dealogic data.

7-Eleven Malaysia initially sought to go public late last year but weak markets prompted a postponement.

Joint global co-ordinators are Maybank and UBS, with CIMB, CLSA and Kenanga acting as joint bookrunners.

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