Investment Highlights

• We raise our FY19-20F net profit forecasts by 2.4% and 5.5% respectively, fine-tune up our FV by 2% to RM1.34 (from RM1.31) and upgrade our call from SELL to HOLD. The new FV is pegged to a FY19F P/E of 27x, which is consistent with the forward P/E of peer 7-Eleven Malaysia in the high 20s. The earnings upgrade is to reflect higher revenue stemming from increased spend per person.

• We recently attended a meeting with Mynews at its HQ, where the new food processing centre (FPC) is being built. We came away feeling positive on the future prospects of Mynews. The key takeaways are: 1. Mynews has introduced Maru Kafe, which is a new café installation in its outlets; 2. The FPC is scheduled for completion by March 2019 and management is working on developing a software, which would help monitor processes and minimize wastage; and 3. Mynews store count has reached 450 outlets and management remains committed in its aggressive store expansion plans.

• Mynews is now offering soft serve ice cream and fresh brewed coffee in Maru Kafe, which officially opened on 15 October 2018. Apart from the soft launch of Maru Kafe at Avenue K on 15 September 2018, Mynews has rolled out the café to 20 other outlets to date. Moving forward, management plans to install Maru Kafe in a total of 200 stores by FY19F.

• We believe Maru Kafe will be able to increase the average spending per person or basket size in MyNews outlets from RM6.20 to RM7.00. With the addition of Maru Kafe, we raise our topline estimates by 6% and 7% in FY19F and FY20F respectively to account for a higher basket size, expected rise in foot traffic and related spillover spending.

• The FPC, which will distribute ready-to-eat (RTE) and bakery products to 600 stores, is scheduled to be completed by March 2019. The FPC is expected to distribute the products to 300 outlets in its first year. These outlets are mainly located in the Klang Valley.
• Mynews is preparing to manage the wastage that will come with the commencement of the food production. The company is currently developing a software to minimize wastage and improve efficiency through its order and delivery system.
• Mynews has opened 81 stores in FY18E bringing the total number of outlets to 450. Management remains committed in its aggressive store expansion plans of 90 stores per year.

• We are excited over Maru Kafe and the completion of the company’s FPC by 1QCY19 although we believe the initial gestation period would take at least a year. In the long run, we expect its gross profit margin to improve underpinned by a higher margin contribution by the oncoming fresh food segment. We maintain our gross profit margin estimates of 37% and 38% in FY19F and FY20F respectively.

• We like Mynews for: 1) its aggressive store expansion plans; and 2) franchise opportunities arising from the full autonomy of its myNews.com brand name. Key risks to Mynews are: 1) restrictions on foreign labour supply (which makes up circa 32% of Mynews’ workers); and 2) a delay in the FPC’s completion.

Source: AmInvest Research - 30 Oct 2018