Investment Highlights

• We maintain our BUY call on Mynews Holdings (Mynews) with a lower FV of RM1.57/share, pegged to a P/E of 25x FY21F EPS. The PE is at a discount to the historical forward PE of peer 7-Eleven Malaysia of 30x to reflect the smaller number of outlets.

• We have cut our earnings forecasts for FY20F and FY21F by 18.7% and 16.5% respectively. This is to account for lower margins resulting from high gestation costs for the FPC (Food Processing Centre) and an increase in the effective tax rate. We have also introduced FY22F earnings forecast for Mynews.

• Mynews’ FY19 PATAMI of RM26.8mil (+1.2% YoY) was below both our and street’s full-year earnings estimates, accounting for 81.8% and 84.9% of numbers respectively. The variance was mainly due to a higherthan-expected effective tax rate and gestation costs from its FPC, which resulted in lower-than-expected margins.

• Key highlights of Mynews’ FY19 results include:

• Mynews’ revenue grew 35.0% YoY to RM528.5mil in FY19 on the back of a higher number of outlet of 513 outlets (+109 outlets from 404 in FY18) and increase in sales from existing stores. Sales in existing stores were driven mainly by the F&B and tobacco categories, improved product offerings, and addition of the Maru Kafe since 4QFY18.

• The FPC is currently producing over 50 SKUs with stringent process and packaging requirements, which increased the cost of sales. We believe this contributed to the 2.2ppt drop in gross margin to 35.5%. Gross margin was also eroded by increased sales of tobacco, which are lower value-added products.

• The higher revenue resulted in an 18.2% rise in FY19 EBIT. However, EBIT margin dropped 1.0ppt YoY to 6.8%. The group suffered from high wastages of more than 20% during the initial roll out of the RTE food. Marketing initiatives were also aggressive during the roll-out. This has led to further erosion of its margins.

• We believe the wastages will remain high as the group’s RTE offerings are entirely new SKUs and are fresh with a shelf life of around 3 days. We expect the group will continue to face challenges in optimising its recipes, logistics and restocking system to ensure optimal take-up rate and minimal wastage.

• However, we believe the startup costs will be slightly 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 period. We estimate net margin of 5.0-5.4% in FY20F-FY21F.

• The group’s PATAMI margin fell 1.7ppt to 5.1% (6.8% in FY18). Mynews was hit by higher effective tax rate which rose 7.6ppt to 26.9% as the group recognized under-provision of income tax and deferred tax. We estimate its tax rate to be circa 25% each in FY20F and FY21F.

• Excluding the food manufacturing segment, Mynews achieved net profit of RM29.6mil with a net margin of 5.6%. Its manufacturing segment recorded a loss after tax of RM5.4mil. We expect the manufacturing segment to continue to drag on the group’s profitability during its gestation period before it reaches optimal economies of scale. We expect gestation period to last around two years.

• We like Mynews for its: 1) franchise opportunities arising from the full autonomy of its myNews.com brand name and 2) long-term growth potential from the 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 - 20 Dec 2019