Investment Highlights

• We maintain our BUY call on Mynews Holdings (Mynews) with a lower FV of RM0.83/share (vs. RM1.16 previously). Our valuation is pegged to a PE of 21x FY21F EPS. We have recently changed our PE multiple to reflect the group’s lower one-year average forward PE resulting from the Covid-19 pandemic.

• We have cut our earnings forecasts for FY20F, FY21F and FY22F by 30%, 31% and 27% respectively. This is to account for lower margins as we assume less store openings, higher FPC (food processing centre) related costs and lower average spend due to Covid-19.

• Mynews’ 1QFY20 net profit of RM4.4mil (-47% YoY; +37% QoQ) was below both our and street’s expectations, accounting for around 15% of full-year earnings estimates. The variance was mainly due to higher costs from its FPC and higher outlet operating and logistics costs.

• Mynews’ revenue grew 14% YoY to RM140.6mil in 1QFY20 on the back of an additional 96 outlets (535 outlets from 439 in 1QFY19) and higher sales of its FPC’s products (ready-to-eat and bakery goods). However, the average spend per outlet dropped by roughly 5% YoY in 1QFY20.

• The higher revenue was not enough to compensate the contraction in the group’s PBT margin. PBT margin dropped by 4.7ppt to 3.6% (8.3% in 1QFY19) in 1QFY20 dragged mainly by a 32% hike in operating costs. This was attributed to higher outlet operating costs and logistic costs resulting from the expansion in business. The group was also hit by higher depreciation expense from its FPC and higher outlet count.

• However, the group’s performance improved slightly sequentially. Its EBIT margin grew 1.3ppt QoQ to 4.8% in 1QFY20 despite a lower footfall period during the yearend holidays and festive period in 1QFY20.

• The FPC was running at around 50% of capacity (estimated breakeven point is 75% capacity utilization) resulting in a loss of RM2.7mil for the manufacturing segment in 1QFY20.

• We had expected the group to reduce the production volume of its FPC in 1QFY20 to minimize wastage during the low-traffic season. However now, we expect the group’s performance to continue to be poor in 2QFY20 due to Covid-19. Instead we expect reduced footfall in the outlets and production volume to remain slow.

• We expect the recovery in earnings to come from 4QFY20F onwards, assuming Covid-19 is contained within 1H2020.

Source: AmInvest Research - 23 Mar 2020