99 Speed Mart Retail (99SMART MK): Offering Speedy Returns from Stable Growth

Recommendation: BUY
Target Price: RM2.00
Date of Recommendation: September 9, 2024
IPO Price: RM1.65
Broker Company: UOB Kay Hian

Investment Thesis:

99 Speed Mart Retail (99SM) is Malaysia’s largest mini-market chain and a leading grocery retailer with a 40.1% market share. It is positioned for continued growth, driven by market share expansion into underpenetrated regions and resilient underlying demand. The company’s proven track record and cash-generative business model are expected to deliver a compounded annual growth rate (CAGR) of 16.2% for earnings from 2023 to 2026.

Key factors driving this investment include:

Leading Market Share: 99SM holds a dominant position in Malaysia’s grocery-based retail market with a 40.1% share in the mini-market sub-segment and 11.6% in the broader grocery market. This provides a significant competitive advantage over its closest rivals.
Resilient Demand: The company benefits from strong consumer demand for daily necessities, affordable pricing, and accessible store locations, which lead to sticky demand and strong foot traffic. Same-store sales growth (SSSG) averaged 6.6% over the past four years.
Growth Opportunities: The mini-market sub-segment is poised for a 10.0% growth CAGR from 2023 to 2028, offering further room for market share accretion and store expansion, particularly in East Coast Malaysia and East Malaysia.

Financial Performance:

99SM is expected to deliver robust financial performance with a free cash flow (FCF) growth of 18.8% CAGR from 2022 to 2026, driven by store expansion, stable operational profitability, and strong brand recognition. The company’s SSSG from 2020 to 2023 has outperformed peers, reflecting its market leadership.

Key Financials (2024-2026 Forecast):

Revenue: RM10,325m in 2024, growing to RM12,539m in 2026.
EBITDA: RM24m in 2024, expected to stabilize.
Net Profit: RM512m in 2024, growing to RM628m in 2026.
Earnings per share (EPS): 6.1 sen in 2024, increasing to 7.5 sen in 2026.
Dividend Yield: 2.8% in 2024, with further increases expected.

Valuation and Catalysts:

The target price of RM2.00, based on 30.0x 2025F PE, reflects 99SM’s growth prospects and market position. While its peers trade at an average of 16.8x PE, 99SM’s resilient demand and stronger SSSG justify a premium valuation. The company is positioned for stable growth with opportunities for further market penetration, especially in underserved regions.

Risks:

Key risks include labor cost increases, supply chain disruptions, and unfavorable publicity or operational failures.

Thank you