KUALA LUMPUR (April 20): Malaysian Rating Corp Bhd (MARC) has assigned a preliminary rating of AA- to 7-Eleven Malaysia Holdings Bhd's proposed RM600 million medium-term notes (MTN) programme with a stable outlook to reflect the group's strong and established market position in the Malaysian convenience store segment.

In a note today, MARC analysts said 7-Eleven Malaysia Holdings had proposed the MTN to refinance existing borrowings and as the convenience-store operator with about 2,400 stores nationwide is expected to continue its rapid pace of expansion with a target of opening 100 to 150 new outlets annually.

"The assigned rating mainly reflects 7-Eleven Malaysia Holdings' strong and established market position in the convenience store segment, gained from a long operating track record with a wide store network that has supported stable earnings generation. 

"Moderating the rating are the prevailing competition within the convenience store segment, particularly in the urban areas, and high operating cost inherent in the convenience store business model that has weighed on operating margins.

"7-Eleven Malaysia Holdings is a non-operating investment holding company with two major subsidiaries: 7-Eleven Malaysia Sdn Bhd, which operates the convenience store chain under the 7-Eleven brand; and Caring Pharmacy Group Bhd, which operates the retail pharmacy chain under the Caring brand. Acquired in June 2020, Caring Pharmacy is expected to contribute about 31.3% p.a. to group operating profit over the next three years,” the analysts said.

7-Eleven Malaysia has about 2,400 stores nationwide, accounting for about 64.9% of the total number of convenience stores held by major operators in Malaysia, according to the MARC analysts.

They said 7-Eleven Malaysia is expected to continue its rapid pace of expansion with a target of opening 100 to 150 new stores annually and that the convenience-store operator has earmarked a capital expenditure (capex) of RM70 million to do so.

"The expansion has provided an extensive geographical reach throughout the country, further entrenching its position. Operating under a long-term exclusive licence from the US-based 7-Eleven Inc, licensing risk is mitigated by its lengthy operating track record. 

"Same-store sales growth however has weakened, partly due to the increased competition in the convenience store segment. This is being addressed by increasing product and service differentiation in its stores, and by refurbishing up to 450 others annually and shuttering underperforming stores. These efforts have resulted in improved operating margins to above 4.0% since 2019,” they said.

Meanwhile, Caring Pharmacy has 144 stores across Malaysia as at end-2020 after growing organically by utilising internal funds for store expansions, as reflected by a low leverage level of about 0.04 times at end-2020, according to the MARC analysts.

Capex has ranged between RM4.1 million and RM8.3 million between 2017 and 2020 and is expected to be maintained within this range in the medium term, they said.

"7-Eleven Malaysia Holdings funded the acquisition of the 75% stake in Caring Pharmacy for RM259.4 million through bank borrowings, resulting in leverage of 3.31x from 1.46x. Group (7-Eleven Malaysia Holdings) borrowings stood at RM533.1 million. The high leverage position is due to a reduced equity base, which stood at RM161.2 million at end-2020, by a reorganisation deficit of RM1.3 billion which arose from a listing exercise in 2014. 

"Without the reorganisation deficit, group leverage would be a moderate 0.35x. Operating profit before interest, tax, depreciation and amortisation [and] interest coverage (excluding lease liabilities) remained strong at above 5.30x,” they said.

At Bursa Malaysia’s 12.30pm break today, 7-Eleven Malaysia Holdings’ share price settled unchanged at RM1.50, which valued the group at about RM1.71 billion.

7-Eleven Malaysia Holdings has 1.14 billion issued shares, according to the company’s latest quarterly results filing with Bursa.