When the sun goes down in Kuala Lumpur, burger stalls become a crowd puller. In Malaysia, there is a strange relationship between burger vendor and 7-Eleven. Burger vendors choose to set up their stall in front of the convenience store because 7-Eleven is a landmark (easy to remember) and it is the only place that is still bright at night.

There seem to be a tacit agreement between the burger vendor and 7-Eleven. If you notice, burger stalls normally do no sell beverages. If the the customer want to buy some drinks, they will have to go inside the convenience store and that’s the economics of having a burger stall in front of the 7-Eleven. In Malaysia, it is largely a takeaway culture as there are no seats for you sit down to enjoy your drink and burger.

In Indonesia, there are attempts by minimart chains Alfamart and Indomaret to place eatery stalls in front of their outlets to drive footfall. This strategy is largely necessitated by the lack of ready-to-eat offerings in minimarts.

However, this strategy is not required for conveniences stores. It has become a trend for young Indonesians to hang out at convenience stores after dark. Ample of food and drinks as well as seats and WiFi are the reasons why they choose to nongkrong (hang out) at convenience stores.

There is no such crowds at Malaysia’s 7-Eleven but things are changing. Newer renovated stores now come with extra seats and are selling more ready-to-eat food but none of the food can compete with the burger where some stalls have become the place to go for makan (eat) after dark. Perhaps 7-Eleven in Malaysia can do a promotion for burger customers by offering them with a discount for beverage purchases.

It appears 7-Eleven is slowly becoming an interesting investment candidate. The stock closed at RM 1.35 on 15 December 2014. Based on the EPS of 3.98 cent for the first three quarters of 2014, the P/E is about 33.92. Assuming a full year EPS of 5.3 cent, the full year P/E will reach 25.44. If the share price falls to RM 1.00, the P/E will only be 18.8.

Can 7-Eleven grow its net profit in 2015 by at least 20%? This is really hard to predict because it really depends on the product mix and the cost structure. Net income grew 34% year-on-year during the first nine months of 2014 as the company spent less on servicing its loans and spending less on administrative and other operating expenses.

By investing at RM 1.00 to RM 1.15, this entry price will give a good safety margin for a company that has the largest share of the Malaysian convenience store market and a low debt level.

SEM meets nearly all my criteria except for margin, which is usually low, at about 3%, for a retailer.

Key worries
1.) GST – The 6% GST staring April 2015 will dampen consumer sentiment resulting in consumers trading down. This is negative for convenience store.

2.) Target to have 2,157 outlets by 2016 – This target is unachievable if past record serves as an indicator. SEM will not be able to open 200 stores per year from 2014 to 2016 to reach 2,157 stores by 2016 unless the convenience store format is as successful as CP All in Thailand where there is an absence of modern minimarts. In Malaysia and Indonesia, convenience stores have to compete for footfall with minimarts.

Number of outlet, 2007-2013

With the falling share price, SEM offers a long-term investment opportunity subject to buying at a low price of between RM 1.00 and RM 1.15.

Disclaimer: Not vested.