Bison Consolidated Berhad

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Mar 29, 2016 - February 2016, the group carried a total of 5,561 stock-keeping-units. (SKU). Out the ... and capabilitie
TA Securities

IPO Monday, March 14, 2016 FBMKLCI: 1,696.54 Sector: Consumer

A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

Fair Value: RM0.92

Bison Consolidated Berhad Not So “Convenient” Valuations

NOT RATED

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

TA Research Team Coverage

Tel: +603-2072 1277 ext 1264

[email protected]

Company Background Bison Consolidated Berhad is the second largest convenience store operator in Malaysia with an estimated market share of 8.6% in terms of total outlets or 6.6% in terms of turnover in 2015. The group operates under its own trade’s names, namely “myNEWS.com”, “newplus”, “MAGBIT”, and “THE FRONT PAGE”. The group began operations 19 years ago under the establishment of its first newsstand outlet under the trade name “MAGBIT”, located in One Utama Shopping Complex, Petaling Jaya. Today, the group’s operates 225 stores with primarily located in Kuala Lumpur and Selangor. It offers customers a broad range of products that can be categories into 5 categories which are 1) tobacco products, 2) food and beverage products, 3) print media, 4) non-food products, and 5) electronic payment services. Merits of Bison Consolidated Berhad  Fully independence trade names and brand.  Experienced management team.  Comprehensive and integrated retail management and control system.  The largest home-grown retail convenience stores player. Investment Risks includes:  Margin could easily be eroded by start-up costs for new stores  Absent of formal dividend policy.  Stretched valuations when compared to peers (domestic and regionally).  Highly competitive retail environment. Valuations We value Bison Consolidated Berhad at 0.92/share based on 20x FY16 EPS.

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Share Information Listing Enlarged Share Capital (mn) Market Cap @ RM0.15 (RM mn) Par Value (RM) Issue price (RM) Oversubscription rate Estimated free float (%) Tentative listing date

Main Market 310.1 341.1 0.20 1.10 N/A 26 29-Mar-16

Tentative Listing Dates Event Opening of the IPO Closing of the IPO Listing

Tentative Date 4-Mar-16 14-Mar-16 29-Mar-16

Ratio & Analysis Proforma NTA/Share (RM) Price to NTA (x) Proforma ROE (%) Proforma ROA (%) Proforma Gearing (x)

0.60 1.84 14.6 13.6 0.04 1.55

Proforma Current Ratio (x)

Utilisation of Proceeds Captal Expenditure Working Capital Estimated Listing Expenses Total

RM(mn) % 50.0 32.2 6.5 88.7

56.4 36.3 7.3 100.0

TA Securities

14-Mar-16

A Member of the TA Group

1.0 Company Background Bison Consolidated Berhad is the second largest convenience store player in Malaysia with an estimated market share of 6.6% in terms of revenue in 2015. Most it’s outlets are concentrated mainly in Selangor and Kuala Lumpur where 77.3% of the outlets are located. Presently, it has approximately 255 stores, which present in all states except Perlis, Kelantan, and Terengganu. That represent a total retail space of approximately 174ksq ft. ranging from 60sq ft. to 2.3ksq ft. for each outlet. Bison operates under its own trade’s names which include, “myNEWS.com”, “newplus”, “MAGBIT”, and “THE FRONT PAGE”. Typically, these outlets are located at shopping malls, hypermarkets, high street locations, office spaces, transportation hubs, and hospital and medical centres. Please refer to Appendix 1 for geographical segmentation of outlets. The group offers customers a wide range of products and services that cater to their “on-the-go” daily needs. Its products can be categorised into 5 groups, which are 1) tobacco, 2) food and beverages products such as prepackaged bakery products, dairy products, and confectionaries & snacks, 3) print media such as periodicals, newspapers, magazines, and books, 4) nonfood products such as batteries, stationery, and personal health care, and 5) consumer services such as electronic payments services for reloads for mobile service providers and selected bill payments. The categories can be further segmented into 3 segments, which are 1) convenience retail products, 2) print media, and customer services. As at February 2016, the group carried a total of 5,561 stock-keeping-units (SKU). Out the total, 71.2% of SKUs are convenience retail products. However, the merchandise and product mix varies depending on locality and size of the outlets and its demographic pattern of the area. While, print media and consumer services accounted for 26.3% and 2.5% of total SKUs respectively. In terms of operating premises, the group did not own the properties on which their outlets operate. All of their outlets are rented from third parties and most of their tenancies are for terms that not exceed 3 years. Corporate Structure Bison Consolidated Berhad’s Board of Director consist of 6 Directors, who are responsible for the company’s future path. They are: Figure 1: Bison Consolidated Berhad’s Board of Directors

Name Ding Lien Bing Dang Tai Luk Dang Tai Wen Dang Tai Kien Soon Dee Hwee Mohd Suffian bin Suboh Source: Prospectus

Age 56 56 42 58 55 39

Date of Appointment as Director Designation 2015 Independent Non-Executive Chairman 2015 Non-Independent Executive Director 2013 Non-Independent Executive Director 2013 Non-Independent Executive Director 2015 Independent Non-Executive Director 2015 Independent Non-Executive Director

Serving as its Managing Director and a member of the group’s Board, Dang Tai Luk opened the company’s first store back in 1996 and since then, played a key role in guiding the strategic direction and growth of the group. He holds a Bachelor of Computer Science and a Master of Science in Computer science from University of Manitoba, Canada. His expertise Page 2 of 8

TA Securities

14-Mar-16

A Member of the TA Group

covers computer networking, systems support, and involved in the development of computer network recovery plans. He also is a sibling to Dang Tai Wen and Dang Tai Kien. Figure 2: Group Corporate Structure Pre-IPO Dang Tai Kein

D&D Consolidated

Dang Tai Gean

5% 93%

2%

Bison

100%

80% 20%

Bison Stores

100%

DKE

100%

Nadi Minda

50%

WH Smith

100%

Kukuh

100%

Eemerge

Bison Foods

Source: Prospectus Figure 3: Group Corporate Structure Post-IPO Dang Tai Kein

D&D Consolidated

Dang Tai Gean

IPO Investors

4% 68.8%

100%

80% 20%

Bison Stores

2%

Bison

100%

DKE

100%

Nadi Minda

50%

WH Smith

Kukuh

26%

100%

100%

Eemerge

Bison Foods

2.0 IPO Statistics Bison Consolidated Berhad entails a public issue of 80.62mn IPO shares, representing up to approximately 26% of the enlarged issued and paid up share capital. Of this, 62.3mn IPO shares, representing 20.1% of enlarged issued and paid-up share capital are under the institutional offering, while the remaining 5.9%, or for 18.3mn IPO shares are offered to retailers. D&D Consolidated who currently own 93% of Bison stake, representing 213.4mn shares. Post IPO, D&D Consolidated sees its ownership diluted to approximately 69%. Utilisation of Proceeds The group intends to spend approximately RM50mn, representing 56.4% of the IPO proceeds on capital expenditure over the next three years. The group plans to spend RM36.6mn on opening 115 new stores and enhancing existing stores. Such expansion is prioritised in major urban areas such as the Klang Valley, Johor, and Penang. The balance of RM14.5mn, will be spent on improving back-end infrastructures and business support functions. This includes: 1) to establish an additional distribution centre in Penang and Johor, 2) to establish a food preparation and packaging facility that would also include cold storage facilities, 3) to improve IT software and capabilities, and 4) to improve current logistics capabilities by acquiring additional transport equipment such as lorries to cater for the Page 3 of 8

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14-Mar-16

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group’s expansion plan. The group also expects to spend approximately RM32.2mn or 36.3% on working capital for the next 3 years. The growth in working capital is in tandem with the growth of the group’s network of outlets. Lastly, the balance of RM6.5mn, accounted for 7.3% of the proceeds will be spend on listing expenses. (See Figure 4). Figure 4: Utilisation of Proceeds Estimated timeframe for Utilisation upon Listing Capital Expenditure Within 36 months Working Capital Within 36 months Estimated listing expenses Within 3 months Details of Utilisation

RM (mn)

%

50 32.23 6.45

56.4 36.3 7.3

Source: Prospectus 3.0 Financial Highlights Sales grew by 15% to RM182.4mn in FY14 and 19% in FY15 to RM217.6mn. On a compounded basis, it grew by an average of 17.4% for the past three years. The total sales generated in FY15 largely from two major products categories, i.e. food & beverages (37.2%) and tobacco products (35.1%). Meanwhile, the growth in sales was driven by two factors i.e, 1) new store opening, and 2) better products and services mix. Note that, there will be a gestation period of 3 years average for a new store to breakeven. Average retail sales per transaction grew by 10% in FY15 to RM5.58. The growth was due to the optimisation of products mix by matching consumers’ demands and preferences across different localities and demographic. We also believe that, with the increase in selling prices for tobacco products, it also helps to increase the value per transaction, as 35% of sales came from tobacco products in FY15. Please refer Figure 5. Figure 5: Average Retail Per Transaction 5.8 5.6

RM

5.4 5.2 5 4.8 4.6 4.4 FY13

FY14

FY15

Average Retail Per Transaction (RM mn)

Source: Prospectus The group’s recorded a decline in retail sales over the total number of outlets in operations from FY13 to FY15. This was underpinned by lower sales from its new outlets that was caused by lacking of new stores opened in prime areas. Meanwhile, its Same-Store-Sales-Growth (SSSG) grew marginally by 2% in FY14 and 1% in FY15. On compounded basis, the group’s SSSG only grew by 1.4% in the past three years. Moving forward, we estimate the group’s SSSG to be on the lower side due to weak consumer sentiment and changing in consumers spending habit. Consumers are Page 4 of 8

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14-Mar-16

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expected to practice selective spending due to raising of costs of living. In addition, most of the group’s stores are located in shopping malls and subject to operating hours of the shopping malls. The group could also expect intensified price war from bigger retailers within the area in the shopping mall. Please refer Figure 6. Figure 6: Average Same-Store Retail Sales Per Outlets 937.6

940 935

930.9

930

RM (mn)

925 920 915

911.8

910 905 900 895 FY13

FY14

FY15

Average Same-Store Retail Sales per Outlet (RM mn)

Source: Prospectus In addition, the group’s net profit grew by 6% to RM12.4mn in FY14 and 9% to RM13.5mn in FY15. Despite the growth in its bottom line, the net margin has been on a downward trend. The net margin contracted by 1p.p. in FY15, and this could be resulting from starts-up costs associated with the new stores opening. Having said that, the low margin is not unusual for trading based companies where merchandise costs make up the largest of total cost. As for Bison, merchandises costs makes up approximately between 66% and 67% in FY13 to FY15. Figure 7: Declining Net Margin 14.0 13.5 13.5

RM (mn)

13.0 12.3

12.5 12.0

11.7

11.5 11.0 10.5 FY13

FY14

FY15

Source: Prospectus

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14-Mar-16

A Member of the TA Group

Moving forward, we expect net profit to increase by 7.6% in FY16 and 14.6% in FY17 on the back of 115 new stores opening in the next 3 years. The net margin is forecast to be around 5%-6% as the outlets increase from 255 to 340 stores. We expect a negative FCF yield in FY16 on the back of its extensive capex and working capital requirements in the next few years. Figure 8: FCF Yield

0.020

2.0%

0.015

1.5%

0.010

1.0%

0.005

0.5%

0.000

0.0%

(0.005)

-0.5%

(0.010)

-1.0% 2013

2014

FCFE/Share (RM)(LHS)

2015

2016 Yield (RHS)

Source: TA Research, Prospectus Some major investment risks faced by the group The followings are some of the business risk factors potentially faced by the group: 1. Intense competition in retail sector, 2. Depend on securing attractive locations at acceptable prices, 3. Stores face security risks, 4. Absent of dividend policy, and may not be able to pay dividends, 5. Disruption in supply of products from key suppliers or increase in prices of products, and 6. Low margin, hence susceptible to increase in operating costs. Valuation Bison Consolidated Berhad is priced at RM1.10 per IPO share. This is derived based on implied PER of 25x based on the group’s PAT of RM13.5mn and EPS of 5.9sen in FY15. We derive a fair value of RM0.92sen/share for Bison Consolidated Berhad, which is at 20% discount to the market market-cap weighted average PER for convenience stores operator in the region. The discount is to reflect Bison’s relatively lower market cap and ROE compared to its peers. The immediate outlook for retail market is undesirable given the weakened MYR vs. USD, and waning consumer sentiment. However the mid-term prospect is favourable mainly due population growth, urbanisation and stable economic growth in Malaysia. In term of dividend, the group currently do not adopt any dividend at the moment. We believe with the declining in FCF/share, the group may use the additional cash to finance their operation, moving forward. Not Rated.

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14-Mar-16

A Member of the TA Group

Earnings Summary (RMmn) FYE October 31

FY13

FY14

FY15

FY16E

FY17F

FY18F

Revenue

158.0

182.4

217.5

254.5

300.3

357.4

18.2

19.2

21.2

18.6

19.9

21.7

6.2

0.1

(0.0)

0.0

0.0

0.0

Core Pretax profit

15.5

16.2

17.7

18.7

20.1

21.9

Core Net Profit

11.7

12.3

13.5

14.3

15.3

16.7

Core EBITDA EI

EPS

(sen)

5.1

5.4

5.9

4.6

4.9

5.4

Core EPS Growth

(%)

0.0

5.5

9.5

(21.7)

7.1

9.3

PER

(x)

21.6

20.4

18.7

23.9

22.3

20.4

Dividend

(sen)

0.0

0.0

0.0

0.0

0.0

0.0

Div Yield

(%)

0.0

0.0

0.0

0.0

0.0

0.0

Peers Comparison Bloomberg Ticker

Company Description

Short Name

Mkt Cap (MYR mn)

7-Eleven Malaysia Holdings Berhad owns, operates, and 7-ELEVEN MALAYSI franchises a chain of convenience stores under the 7-Eleven brand name. PT Midi Utama Indonesia Tbk operates a chain of retail stores. MIDI IJ EQUITY MIDI UTAMA INDON The Company operates convenience stores in Indonesia. E-MART Inc. operates E-Mart discount stores. The Company 139480 KS EQUITY E-MART INC retails food, clothing, household goods, electronics, and other items through several branch stores. CP ALL PCL operates convenience store chains in Thailand and China. The Company also owns and operates the a department CPALL TB EQUITY CP ALL PCL store chain located primarily in Shanghai city and Chonqing city of China. PT Modern Internasional Tbk distributes imaging industrial products and equipment for medical, graphic art, and document MDRN IJ EQUITY MODERN INTL solutions with various brands. The Company also focuses on the development of convenience stores. SEM MK EQUITY

P/E (x) Weighted 2015 PE

1,653.3

30.4

0.7

705.6

16.0

0.2

17,115.6

11.0

2.8

47,590.5

29.8

21.1

182.2

40.6

0.1

67,247.2

24.9

Peers Comparison

Company Name 7-ELEVEN MALAYSIA E-MART INC CP ALL PCL MODERN INTL

Mkt Cap (RM mn) 1,641.3 4,920.1 413.2 599.3

EPS Growth (%) 2016 2017 15.2 17.0 (26.0) 12.7 16.9 18.9 65.8 35.7

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P/E (x) 2016 2017 26.2 22.4 13.0 11.6 25.9 21.8 24.8 18.2

ROE (%) 2016 2017 34.0 34.0 5.5 5.5 38.0 38.0 2.3 2.3

Dividend Yield (%) 2016 2017 2.2 2.4 0.9 0.9 2.1 2.4 1.2 3.2

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Appendix Stores according Geographical Location

Centralised Distribution Centre and in-House Logistics Team

Products Categories

Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 (A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan – Head of Research Page 8 of 8