Investment Highlights

• We maintain our BUY call on Mynews Holdings (Mynews) with an unchanged FV of RM0.83/share, pegged to a P/E of 21x FY21F EPS. The PE is based on the company’s average 1 year forward P/E.

• We like Mynews for its: 1) franchise opportunities arising from the full autonomy of its brand name; and 2) growth potential from its food processing entre (FPC) offering ready-to-eat (RTE) and bakery products. Key risks to Mynews are: 1) restriction on foreign labour supply; and 2) sudden plunge in office workers’ footfall

• The key takeaways from the investor’s conference call are as follows: 1. Online sales have been volatile since the movement control order (MCO) was initiated. 2. Average ticket size was still high, around RM7.60 in 1QFY20. 3. 10% stores are closed during the MCO but the group believe it could reach 20% if the MCO is extended. Rental discount negotiations are in progress. 4. No disruptions in supply chain and inventory remains at a comfortable level. 5. Sales of tobacco, beverages and snacks have increased but the group expects fresh food mix to increase as customers’ pantry stock deplete with the ongoing MCO. 6. The group plans to add 100 new stores in FY20F but cautions that these could be scaled down if the MCO is extended. The group has seen some delays to its new stores as renovations works were halted during the MCO.

• Mynews’ online sales surged 35% on the first day of the MCO. It has been volatile ever since. We do not expect the surge in online sales to significantly compensate the loss of physical sales during the MCO. We also expect footfall to continue to be weak as long as the Covid-19 pandemic is still rampant, office goers limit external contacts and tourist arrivals remain minimal.

• Average spend per receipt was strong in 1QFY20 at around RM7.60 (FY19: RM7.43) on the back of the installation of Maru to over 200 stores. However, as Maru offerings such as coffee and ice cream are not available online, we expect the average spend to drop due to the lower footfall during the MCO and Covid-19 pandemic.

• The group has closed around 10% of their stores due to the MCO. Mynews expects up to 20% outlets to be closed if the MCO is extended. The staff of affected stores were mobilized to other stores that are open. We believe the group’s net margin will be impacted as operating costs remain high despite fewer operating stores and shorter operating hours (earlier closing time during the MCO). The group is in the midst of negotiations for rental discounts during the period. We have not factored in reduced rental or claim of business disruption insurance.

• Positively, the group said that its supply chain has not been disrupted. Also, the group’s inventory levels are comfortable. Sales of tobacco, beverages and snacks have increased but the group expects fresh food mix to increase as customers’ pantry stock deplete with the ongoing MCO. We believe the group’s gross profit margin will remain at around 35% in FY20F.

• The group plans to add 100 new stores in FY20F but cautions that these could be scaled down if the MCO is extended. Although Mynews has opened 18 stores in 1QFY20, the group is seeing some delays to the opening of other new stores as renovation works are halted during the MCO. We have reduced our assumption of new stores to 80 stores in FY20F and 90 stores in FY21F.

• We now expect the FPC to break even one year later than the initial target of end-2020. Assuming the containment of Covid-19 within 1H2020, the group’s earnings are expected to recover in 4QFY20. The manufacturing (FPC) segment is expected to drag the group’s profitability as it is in its infancy (loss of RM2.7mil in 1QFY20). The segment is pushing up the group’s effective tax rate (40% in 1QFY20) as the group’s earning base is lowered.

• We expect Mynews’ net profit to contract by 23% in FY20F due to Covid-19 and FPC’s gestational costs. However, we expect net profit to rebound by 27% in FY21F as sales gradually recover.

Source: AmInvest Research - 23 Mar 2020