This article first appeared in The Edge Financial Daily on December 3, 2019

7-Eleven Malaysia Holdings Bhd
(Dec 2, RM1.43)
Maintain add with an unchanged target price (TP) of RM1.68: 7-Eleven Malaysia Holdings Bhd (SEM) has entered into a conditional share sale agreement (SSA) to acquire 55.2 million shares or a 25.4% stake in Caring Pharmacy Group Bhd (not rated) from Motivasi Optima Sdn Bhd holding a 50.4% stake in Caring, for a cash consideration of RM143.5 million or RM2.60 per share. Inclusive of a 13.2% equity interest held by relevant parties including Tan Sri Vincent Tan, a substantial shareholder of SEM, SEM and related parties’ shareholding in Caring will rise to 38.6%. For this acquisition to materialise, SEM must obtain shareholders’ approval at an extraordinary general meeting and, if required, any relevant authority and/or party’s consent.

If the SSA materialises and is unconditional, SEM’s stake in Caring, including the stake held by relevant parties, will breach the 33% threshold, therefore SEM is obliged to extend a mandatory general offer (MGO) for the remaining Caring shares at a cash offer price of RM2.60 per share. Take note: This proposal is conditional upon SEM and its parties controlling in total more than 50% voting shares in Caring. With the MGO, we believe SEM will acquire sufficient shares to recognise it as a subsidiary, hence consolidate its financial results. The MGO is targeted for completion by the first half of 2020.

The offer price of RM2.60 per share is at a 4% premium to Caring’s last closing share price of RM2.50 on Nov 28, 2019. This implies a 3.7 times price-to-book value and a price-earnings (PE) multiple of about 27 times to Caring’s net profit of RM20.7 million for the financial year ended May 31, 2019 (FY19). We view this offer price is fair given synergies between both businesses; it is in line with Caring’s five-year historical average PE of 26.6 times (source: Bloomberg); and at a discount to SEM and Mynews Holdings Bhd’s (“add”; TP: RM1.57) historical PE of 30 times to 32 times. SEM said it is looking to fund this acquisition via internal funds and bank borrowings.

We estimate this acquisition will be earnings-accretive assuming annual borrowing costs to fund this acquisition are below 3.6% (SEM’s FY18 borrowing cost: 5%), and Caring’s profitability is unchanged at RM20.7 million for FY19. Downside risks are a weaker-than-expected consumer spending and poor cost-control efforts. The rerating catalyst is a spike in same-store sales growth. — CGS-CIMB Research, Nov 29