Investment Highlights

• We maintain our BUY call on Mynews Holdings (Mynews) with an unchanged FV of RM1.66/share, pegged to a P/E of 27x FY20F which is at a discount to the historical forward PE of peer 7-Eleven Malaysia of 32x to reflect the smaller number of outlets.

• The key takeaways from our visit to Mynews’ Food Processing Centre (FPC) yesterday (which commenced operations in June 2019 and officially opened in October 2019) are as follows:
  1. Its utilization rate is at the 40% level as it is still in its early days.
  2. The ready-to-eat (RTE) products have been rolled out to over 300 stores.
  3. The main focus for the group remains to be on network expansion of around 100 stores in FY20F to fully realise its FPC’s      potential.

• The FPC is divided into 2 separate subsidiaries, Mynews Kineya and Mynews Ryoyupan to ensure clear segregation of the respective businesses. The FPC is currently producing over 50 SKUs although utilization is low at 40% (33% in October) as it is still in its early days. We were impressed with the superior hygiene practices and highquality product assembly. However, we note that these stringent processes and packaging quality add to its cost of sale resulting in a higher price point for its RTE products.

• The group has rolled out its RTE products to more than 300 outlets while wastage remains high at over 20%. As its RTE offerings are entirely new SKUS and are fresh with a shelf life of around 3 days, the group is bound to face challenges in perfecting its recipes, logistics and restocking system to ensure optimal take-up rate and minimal wastage. This has already been factored in to our forecasts as we expect gestational costs to persist for at least one year. We expect net margin of 6.2%–6.4% in FY19F–20F (6.7% in FY18).

• However, we believe the startup costs will be partially offset by a better product mix as we anticipate sales volume of its higher margin F&B products to limit the downside margin pressure from the gestational costs.

• The group remains committed to increase its network expansion by around 80–100 stores in FY20F in order to fully realise its FPC capabilities. We assume in our forecast the number of outlets to surpass 600 in FY20F (from 498 in 9MFY19) with revenue growing by 23%.

• Meanwhile, Maru Kafe has been installed in more than 150 outlets. Recall that in June, outlets with Maru enjoyed a 19% increase in average sales volume, +15% in average customer count and +13% in average basket size. We believe the continued roll-out will further improve its average sales volume, customer count and basket size.

• We like Mynews for its: 1) franchise opportunities arising from the full autonomy of its myNews.com brand name; and 2) growth potential from its food processing centre (FPC) offering ready-to-eat (RTE) and bakery products. Key risks to Mynews are: 1) restrictions on the supply of foreign labour (which makes up circa 32% of Mynews’ workers) and (2) slower-than-expected take-up rate of its RTE products.

Source: AmInvest Research - 6 Dec 2019