Potential divestment of Caring Pharmacy?
- According to an article by The Edge Malaysia, SEM is said to be considering a potential divestment of its 75%-owned Caring Pharmacy group (Caring).
- The indicative RM1.8bn deal values its 75% stake at RM1.3bn and Caring at 56.7x average P/E (FY22-24F) vs. 27x when it was acquired in 2020.
- Based on our estimates, the potential disposal of Caring could lead to earnings accretion of 33-36% for SEM’s FY22-23F EPS.
SEM could be divesting its pharmaceutical arm for RM1.3bn
According to an article by The Edge Malaysia, 7-Eleven Malaysia (SEM) is said to be looking at a potential divestment of its pharmaceutical arm (Caring) after attracting interest from some Japanese parties, potentially valuing the entire pharmacy group at RM1.8bn. Assuming the potential divestment is only in exchange for cash, w e believe that SEM could receive cash proceeds worth RM1.3bn, based on its 75% stake in Caring and record a potential gain on disposal of RM1.0bn (based on cost of investment of RM292m w hen it took over the company in 2020). At this juncture, w e understand that SEM has neither confirmed or deny of the said new s article published by The Edge Malaysia.
Indicative offer of RM1.8bn values Caring at 56.7x P/E
According to the article, SEM is seeking a valuation of about RM1.8bn for Caring. This values it at 56.7x P/E (average net profit in FY22-24F). We find the valuation rich as SEM acquired Caring at an implied P/E multiple of c.27x in 2020, just two years ago, albeit Caring’s sales and net profit have doubled since then.
Disposal proceeds could raise FY23-24F EPS by 33-36%
We are positive on the new s if it materialises as it allow s SEM to focus on growing its core convenience store business and strengthen its financial profile. We have also conducted a scenario analysis (Fig 1) on the impact on FY23-24F EPS. We estimate the potential disposal could lift FY23-24F EPS by 33-36%, assuming: i) it receives cash proceeds of RM1.3bn, ii) pares down its debt entirely (interest cost savings of RM43m p.a.), iii) interest income of RM17m p.a., iv) completion of this deal by 4Q22F, and v) taking into account of Caring’s FY23/24F net profit contributions of RM30.7m/RM32.0m.
What SEM has done since taking over Caring
Caring w as previously listed on the Main Market of Bursa Malaysia until its delisting on 8 May 2020 w hen SEM took over. Since then, the number of Caring outlets has increased from c.130 to c.199 as of 31 Mar 2022 through organic store expansion and the acquisition of a 67% stake in The Pill House Pharmacy (“Georgetow n Pharmacy”) and a 60% stake in Wellings Pharmacy in 2Q21. SEM has also ventured into the Indonesian pharmacy market via a joint venture. As of 31 Mar 2021, Caring’s customer loyalty programme has more than 1m validated members and 531k mobile app users which is a testament to its strong customer base and operating scale.
Retain Hold with a TP of RM1.48
Our FY22-24F EPS forecasts and Hold call are intact. Our TP remains at RM1.48, based on 22x FY23F P/E, 1 s.d. below its 5-year mean P/E of 31.1x. Despite rising competition in the convenience store (CVS) space, w e believe that its share price should be supported by its dominant position in the CVS and pharmaceutical space in terms of store count (c.2,437 7-Eleven stores and 199 pharmacies as of 31 Mar 2022).