This week, Bursa Malaysia welcomes the much-heralded initial public offering (IPO) of 99 Speed Mart Retail Holdings, billed as the largest listing (in terms of total monies raised) since that of Lotte Chemical Titan in 2017. A total of 1.428 billion shares were sold to the public (retail and institutions) — 400 million new shares issued at RM1.65 (50 cents) each, raising RM660 million for the company, and 1.028 billion of existing shares offered for sale by the company’s founders Lee Thiam Wah and his wife (raising proceeds totalling RM1.7 billion). The two major shareholders will retain a 79.7% stake in the company post-listing, assuming no additional sale in over-allotment shares (if the options are fully exercised, their shareholding will drop to 77.2%).
At the IPO price, 99 Speed Mart’s market capitalisation would be RM13.86 billion, making it the 36th-largest company on Bursa (based on prices at the point of writing). It is quite likely that its market cap will be even higher upon listing. To be sure, the stock is not cheap by most yardsticks — the IPO is already fairly valued at a trailing price-earnings ratio (PER) of 29.1 times. But we think the stock will trade at premium valuations (relative to the broader market and in line with the largest consumer companies on the local bourse) for its relatively defensive business, strong balance sheet (net cash post-IPO), brand name and market positioning, as well as growth prospects. The company can grow at least 7% to 10% annually for the next three years. Consensus estimates a compound annual net profit growth of 13% on average for 2024 to 2025.
99 Speed Mart’s business model is one of volume and scale. As Lee once said in an interview, “If you don’t have scale, you can’t compete with Chinese medicine halls on pricing, and you can’t compete with hypermarkets in terms of range.” And where 99 Speed Mart cannot undercut on price, it sells products in smaller sizes.
Yes, competitive advantage is not only about relative pricing (to the competition) but also prices in absolute terms. This is particularly relevant when the target market is low-mid-income households, including the big migrant population. Remember, back in the day, many would buy cigarettes by the stick instead of the whole box from sundry, provision and coffee shops — even though the price was more expensive per stick? The keyword here is affordability. Absolute price matters. It is no different today, when businesses reduce package size and/or lower quality to avoid raising prices too high while also maintaining their profit margins. Think your shrinking bowl of noodles.
Scale is 99 Speed Mart’s economic moat. To achieve volume, the company typically sells only products with the highest demand (turnover). With the larger volumes, it can purchase at lower costs and make a decent margin, even when it then sells at prices that are lower than competitors, which in turn attracts more customers and boost volume further. Additionally, the ability to move volume sales means that it is able to earn higher product display fees, incentive fees, distribution centre fees as well as advertising and promotional fees, which make up about half of the profit from operations.
It is like the flywheel terminology, self-reinforcing cycles that drive growth and value. More sales, more users, more value and profits. Case in point: 99 Speed Mart’s inventory turnover days (49 days) is much lower than competitors such as 7-Eleven (77 days) and My News (65 days) while its margin is much higher. Both 7-Eleven and myNEWS are barely eking out a profit. 99 Speed Mart also makes it much harder for new players, without the same economies of scale, to break into the market and gain a share.
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The company plans to add 250 outlets each year between 2024 and 2027, from its base of 2,526 stores as at end-2023. Growing the network will bring its stores closer to the people — its slogan is “Near n’ Save” — and further improve economies of scale and its competitive advantage. But there is always a limit to growth. The question is, where is 99 Speed Mart in the current S-curve?
Its planned outlet expansion suggests that growth (the orange-coloured line) is already slowing compared to the earlier years (see Chart 1). Having said that, same-store sales growth (SSSG) is still positive and higher than that of another ubiquitous retailer, MR DIY, whose business model too is based on volume and price (see Table 1). SSSG for MR DIY has turned negative in 2023 and the first two quarters of 2024 — this means the company is generating fewer sales from established stores compared with the previous corresponding periods.
Negative SSSG could suggest market saturation, increased competition, loss of market share, changing consumer preferences and so on. Persistently negative SSSG raises concerns over the sustainability of future growth and profitability, where growth is being driven by new-store expansion.
Summary
We think 99 Speed Mart is a genuine business and the founders have executed very well to leverage the change in consumer preferences, from big-store format to the convenience of neighbourhood shopping for daily necessities. Its strategy to focus on fast-moving products at low prices has been very successful, underpinning its rapid store expansion. And as we said, scale in an economic moat.
We believe the stock will do well post-listing and is likely to command premium valuations over the broader market, and is in line with the largest listed consumer companies on Bursa — supported by its relatively defensive business, strong brand name and market leadership, as well as growth prospects. Growth over the next few years will be underpinned by both new-store expansion and positive SSSG. Proceeds from the IPO will be used to expand its store network as well as enhance distribution and logistics efficiency (new distribution centres and delivery trucks). We think 99 Speed Mart can grow at least 7% to 10% annually over the next three years. The company is expected to maintain a strong balance sheet (net cash) based on its ability to minimise inventory turnover days and generate healthy cash flows from operations. Management has committed to a 50% dividend payout policy, which will offer shareholders a dependable income stream.
Eventually, though, 99 Speed Mart will hit market saturation point for its existing convenience store business (the top of the S-curve), where growth tapers off. The population can support only an optimal number of stores, before fewer and fewer prime new store locations affect sales per store (for instance, owing to lower population density, lower disposable incomes and household spending) and when new and existing stores start to cannibalise each other. Case in point: The focus of 99 Speed Mart’s planned new stores is in the east coast and East Malaysia, where it currently has a smaller presence than elsewhere. Its stores are already ubiquitous along the west coast states of Peninsular Malaysia, especially in the Klang Valley, Perak and Johor. What comes after, its outlook in the longer term, will depend on how successfully the company reinvests and reinvents to create another S-curve, a new growth driver, whether through related or unrelated diversification.
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The Absolute Returns Portfolio lost 1% for the week ended Sept 4, paring total returns since inception to 7.3%. Stocks in the portfolio saw mixed performances with Berkshire Hathaway (+3%), Itochu (+2.8%) and DBS (+2.6%) gaining while Swire Properties (-9.1%), Airbus (-5.4%) and CRH (-2.9%) ended lower.
We added five relatively low risk stocks to the Malaysian Portfolio last week, reducing cash holdings to about 28% of total portfolio value. We will elaborate on these stocks and the Malaysian stock market next week. The portfolio fell 0.2%, faring slightly better than the FBM KLCI, which fell 0.3%. KSL Holdings (+6.7%) and IOI Properties Group (+3.6%) were the two gainers. The biggest losers were Insas Bhd — Warrants C (-9.1%), Kumpulan Kitacon (-2.0%) and Gamuda (-1.8%). Total portfolio returns now stand at 192.9% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 8.7% by a long, long way.
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