A Qualitative Look At The Business Model Of Bison Consolidated

When Bison was listed in KLCI last year, I was extremely excited at the prospect of investing in Malaysia largest home-grown retail chain with an estimated market share of 8.6% in terms of numbers of outlet. The retail convenience store is a fairly simple business to understand (but not easy to run). For those who do not know, Bison Consolidated is the holding company of retail convenience stores such as MyNews.com and WH Smith.

Grocery Retail Market and Penetration Rate

Based on figures from Smith Zander, the grocery retail market has a market size of RM 3.3 billion growing at about 13.6% each year. As much as 2776 number of outlets was recorded in year 2015. However, the Malaysian grocery retail market is still deemed underpenetrated (135 stores/million people). In comparison to other countries, Thailand (145 stores/million people), Singapore (162 stores/million people) and Taiwan (419 stores/million people). It should be noted, however, the population density in these countries is much higher.

High Valuation Justified?

The retail convenience store business commands high P/E among investors. Bison’s direct competitor (7 times larger) – 7-11 Malaysia is even trading at a hefty P/E of 37 times! Despite the rich valuation, I believe the premium is warranted. The retail convenience store business offers sustainable earnings going forward less affected by cyclical turns. Good or bad economy, people will still visit your store to buy the convenience goods. Also, this business has a high scalability where the business model could be replicated and applied else where. Analysts have estimated that Bison will offer 27% in CAGR for FY 16 – 19F.

Business Overview

I highly recommend readers to watch the above video on Bison Consolidated. The host has provided an impressive overview of MyNews.com business. For more detailed information, readers may read its IPO prospectus or its latest annual report for the financial year 2016 to gain a better understanding.

How much does it take to open 1 MyNews.com outlet?

The average size of a MyNews.com outlet ranges from as small as 60 square feet to as big as 2300 square feet. The typical CAPEX required for store expansion is between RM 175,000 to RM 250,000. The low CAPEX requirement has made such business a low barrier to entry business.

Untitled

One year after the IPO, the company still has almost RM 60 million of the proceeds remaining. Assuming each store takes RM 400k to open, Bison should have sufficient capital to support the expansion of at least 150 stores.

Business Model

One thing that I really admire about MyNews.com is their practice of a lean business model. This type of business model focuses on maximal efficiency while minimizing costs. In my opinion, MyNews.com is the mini version of Europe’s ALDI.

p01_pe1_mynewsdotcom

Picture adapted from Empire Shopping Gallery Website

Limited Selection of Goods & Cost Leadership

If you walk into any MyNews.com outlet today, one trait that you may notice in their smaller stores are the limited selection of goods as compared to their immediate competitor 7-11. While I do not have the exact number of SKUs that MyNews.com carry in their stores, basically as a customer, you would find the most common items such as carbonated drinks, snacks and print medias in their stores and nothing fancy.

The practice of carrying limited SKUs is actually one of the most common tool that a retailer can engage to achieve lower costs of goods. The flexibility to store only the fast-moving items while phasing out the slow moving goods is extremely important in a low margin environment where every % counts. Furthermore, MyNews.com is in the business of providing convenience to customers. In a retail convenience stores, a prospective customer would have already know what they want before they walk into such stores.

smeb_to_300315_nnnews_to_2

Picture adapted from The Star

Low staff costs

Next, I would like to highlight its low staff costs. Based on their latest annual report, it could be seen that staff costs for their retail outlets amounted to about RM 19 million or about 7% of revenue. MyNews.com strategy of staffing outlets is aligned to their lean business model. For the smaller sized stores eg. Midvalley, I have always noticed only one single staff manning the whole outlet. The number of staffs that an outlet should place has to be proportional to the sales of the outlet. Over-staffing a retail outlet is one of the most common killer of profitability in this business.

Location, Location, Location!

Based on an interview with The Edge, Bison’s CEO has targeted 400 stores by the end of 2017. With MyNews.com wide reach in the streets of Klang Valley, one may think that MyNews.com make most of their money in the neighborhood high-steet outlets. However, based on information from the annual report, shopping mall outlets is still the biggest contributor of revenue compared to the other types of outlets. So, what does this tell us? A good retail convenience store has to be situated in a highly dense and high footfall locations in order to maximize revenue.

For a low margin business, a retail outlet has to achieve critical mass in terms of revenue. In fact, the average annual revenue per store of MyNews.com is about RM 870k or RM 2.4k per day while its average EBITDA per store is a mere RM 70k. Essentially, being in the retail business is also being in the real estate business where location counts.

Future Development

Moving forward, the ability of MyNews.com to secure high footfall locations is crucial to its future profitability. The company’s recent expansion into transportation hubs eg. MRT stations is a good move. In addition, the company also had concrete plans to expand in Johor in a big way with the acquisition of a sub-distribution centre. Based on the information provided by CIMB Research, Johor has the highest average annual growth rate of monthly household income in Malaysia (influx of SGD perhaps?).

householdincome

Fundamentals

As of 1st April 2017, Bison Consolidated has a market cap of approximately RM 600 million. It is currently trading at a P/E of 32 times. Share price has run up from the IPO price of RM 1.10 a year ago to the present RM 1.92. The wonderful business of MyNews.com has definitely caught the attention of many investors.

For the financial year 2016, Bison has posted the following result;

No. of Stores: 303 outlets (Including WH Smith outlets)

Revenue: RM 264.03 million

Revenue Per Store:

Profit After Tax: RM 18.13 million

EBITDA: RM 21.4 million

EV Per Store: ~ RM 2 million

EBITDA Per Store: ~ RM 70,000

EV/EBITDA: 28 times

References:

  1. Bison Annual Report 2016
  2. CIMB Initial Coverage Report

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