99 Speed Mart IPO: Should you subscribe?

Billed as the largest IPO on Bursa Malaysia in the past 7 years, 99 Speed Mart’s upcoming listing is rousing Malaysian investor’s appetite for IPOs.

Whether you are a Malaysian excited and interested in subscribing to the IPO, or a Singaporean unfamiliar with the company, I hope you will gain valuable insights about the company by the time you reach the end of the article.

99 Speed Mart Business Model

99 Speed Mart’s business model is just as its name suggests – it operates a chain of minimarkets.

Minimarkets are essentially sundry shops that have undergone some form of modernization and offer a range of products, including cold and frozen items.

Founded in 1987 as a small single sundry shop in Selangor, 99 Speed Mart Holdings Berhad (KLSE: 99SMART) has expanded over the years to 2,651 outlets across Malaysia.

These outlets are mainly concentrated in the Klang Valley area, which covers most of the Selangor state.

The moat value proposition of the company’s business lies in its sheer size and ubiquity – it is strategically situated near housing areas, making it convenient for customer to pick up their essential sundry goods. It offers goods at cheaper prices, and patrons usually need not subject themselves to jams and car park surcharges to grab what they need.

For Singaporeans, think of it like having a Sheng Siong just downstairs of your HDB or just a mere 5-minute walk away.

The valuation & IPO objectives

99 Speed Mart Retail Holdings Berhad will be raising a whopping RM 2.4 billion, putting the company at a valuation of RM 14 billion.

This includes RM 660 million to be raised through the issuance of 400 million new shares.

Wondering how much RM 14 billion is? RM 14 billion will make 99 Speed Mart more valuable than Fraser & Neave Holdings Berhad (KLSE: F&N), which has a market cap of RM 11 billion.

It will also be larger than Hartalega Holdings Berhad (KLSE: HARTA) and Top Glove Corporation Berhad (KLSE: TOPGLOV), both trading at market caps of RM 9 billion and RM 7.4 billion, respectively.

The proceeds from the IPO will primarily be used for the expansion of the network of outlets, with 60% earmarked for this purpose.

Another 23% will be used to establish new distribution centres and purchase of new delivery trucks, while the remaining balance will be used to pare down bank borrowings and defray fees and expenses for the IPO.

After the IPO, assuming the over-allotment option is fully exercised, Mr Lee Thiam Wah, the company’s founder and chief executive will remain the substantial shareholder with a 51.5% stake.

The financials

The blueprint for commanding a rich valuation is always to promise and demonstrate growth prospects. Revenue grew from RM 8.1 billion in FY 2022 to RM 9.2 billion in FY 2023, reflecting a 14% growth YoY.

However, profit before tax did not show consistent YoY growth over the 3 years of audited results presented. A closer look at its profit margin analysis gives a hint and reaffirms a fact – retailers have razor-thin margins.

For retailers, It is a volume game to grow earnings per share.

Gross, EBIT, and PAT margins have decreased over the past 2 years since FY 2021. With a net profit margin ranging from only 4-5%, Speed Mart would need to grow its revenue aggressively and ensure its costs are strictly optimized to increase the likelihood of growth in its earnings per share.

Operating metrics and indications

For businesses with brick-and-mortar outlets, outlet growth broadens the “moat”, providing more convenience to customers by bringing sundries and essentials closer to them.

Retailers like 99 Speed Mart are essentially a logistical play, strategically placing their outlets in areas where customers choose to visit due to convenience and reduced hassle – offering the path of least resistance.

However, that does not mean a “blitzkrieg” approach to expanding the total number of outlets is the silver bullet for perpetual growth. There will be a saturation point, where having too many outlets will negatively impact same-store-sales growth (SSSG). This means new outlets located too close to existing ones will cannibalize sales from the existing outlet.

99 Speed Mart outlets serve approximately 1.1 million customers per day. Each outlet recorded an average of 475 transactions per day in the latest fiscal year ending in 2023. For same-store sales growth, there was a dip in FY 2022 before rebounding to 6.2%.

The justification given for the dip in the negative SSSG for FY 2022 was due to the easing of COVID-19 movement restrictions.

But an excerpt on its SSSG in FY 2020 raises eyebrows. SSSG back in FY 2019 was 21.8%, while SSSG for the fiscal period ending 31 March 2024 stands at just 1.8%.

Lastly, on a per-outlet basis, average sales per outlet have declined compared to FY 2021, with the average value of each transaction also tapering off.

Valuation + basic maths to run through

Let’s calculate how much each 99 Speed Mart outlet is worth, based on its capability to draw an average of RM 4.02 million in revenue (calculated as RM 10,593.92 x 365 days).

With 2,651 outlets and a valuation of RM 14 billion, this means each outlet is, on average, worth approximately RM 5.28 million.

Using a simple price-to-sales ratio, interested IPO subscribers would be paying 1.3x price-to-sales valuation.

If we compare the FY 2023 revenue of RM 9.2 billion against the sought-after valuation of RM 14 billion, the valuation worsens to 1.5x time.

On a price-to-earnings front, it comes at a steep 34.7x valuation.

Competition comparison

99 Speed Mart’s approach of managing multiple smaller outlets within neighbourhoods, offering better prices and convenience, has certainly helped it outperform the likes of chain hypermarkets.

It boasts the largest revenue in FY 2023 when compared to other players in the supermarket, convenience store and hypermarket categories. We can also observe that the razor-thin margins are a common challenge across all types of retailers.

An interesting observation would be another up-and-coming convenience store player – KK Supermart and Superstore which would be 99 Speed Mart’s toughest competition. Both employ a similar guerilla approach of establishing a presence in residential areas while offering competitive pricing and convenience.

My thoughts

While 99 Speed Mart has ambitious plans for international growth, as an investor who has seen many parts of the world and market, I know that this is easier said than done.

There are plenty of 99 Speed Mart equivalents in other countries and regions. Capturing the lion’s share in a home market while also trying to emerge victorious in geographical expansion is a mammoth task.

I have personally witnessed how Giant faltered in Singapore and also exited the Malaysian market after being dominant for a relatively long period. Size, logistical supremacy, cost optimization and growth are crucial in ensuring EPS growth to justify share price appreciation.

99 Speed Mart’s story is certainly an aspirational growth story for entrepreneurs, but it is not my cup of tea as a potential investment via IPO subscription.

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