Investment Highlights

• We downgrade our recommendation for Mynews Holdings (Mynews) to HOLD from BUY with a lower FV of RM0.67. Our valuation is pegged to a PE of 21x FY21F EPS.

• We have cut our earnings forecasts by 24% for FY20F, 19% for FY21F and 17% for FY22F. We think that the impact from the Covid-19 pandemic has set back the turnaround period for its new food processing centre (FPC), prolonging the gestational period. We also think that the earnings performance will remain subdued in the upcoming quarter due to the full-blown impact of the movement control order (MCO).

• Mynews’ 1HFY20 PATAMI of RM2.0mil (RM16.2mil in 1HFY19) was below our and street’s expectations, accounting for only 10% of our and concensus’ full-year earnings estimates. The variance was mainly due to worse-than-expected performance during the MCO as well as a higher number of temporarily closed stores than anticipated.

• Although Mynews had 83 more stores (539 stores) compared with the 456 outlets 2QFY19, its 2QFY20 revenue fell 12% YoY (-7.1% QoQ) to RM123.5mil. This is because some of its outlets were temporarily shuttered and there was also a drop in daily sales during the MCO.

• We estimate that the average spend per outlet in 2QFY20 (based on 85% operating stores) was roughly RM263K whereas that in 2QFY19 (assuming all stores were fully operational), it was RM288K), a 9% decline YoY.

• We think that the group’s optimization initiatives during the MCO ultimately also hurt sales as we believe there were less RTE and baked goods offerings in some of the store we visited during the period.

• The group has temporarily closed around 10% of their outlets at the start of the MCO and around 35% in April 2020. At the moment, it has reopened some of the outlets although there are still roughly 10% of Mynews stores that remain temporarily shuttered.

• 2QFY20 gross profit fell 11.5% YoY as gross margins slipped 1.7ppt YoY (-2.2ppt QoQ) to 33.3%. We think that this is due to the decreased supply of its RTE offering in part of March and April when the MCO was initiated. At this time, the production volume at its FPC was throttled down due the change in demand patterns from consumers during the period.

• Ultimately, the impact from Covid-19 has pushed Mynews’ earnings performance to the red in 2QFY20 with a net loss of RM2.3mil.

• For 1HFY20, revenue rose 3% YoY to RM264.1mil. The increase was mainly attributed to higher number of outlets as well as the contribution from its FPC’s offerings. However, profitability took a hit due to the high gestational costs of its FPC, coupled with the impact of the Covid-19 pandemic and MCO.

• Moving forward, we think Mynews’ earnings performance will remain subdued in 3QFY20F. The group’s FPC was temporarily closed in May before production recommenced on 14 June 2020. We think that there will be further downward pressure on the group’s margins due to the absence of RTE offerings, which garner a high margin. However, we think that following the easing of the MCO, footfall will gradually return and demand will creep back up. Hence, we think earnings recovery will slowly seep in in 2HCY2020F.

• We expect Mynews’ PATAMI to contract by 41% in FY20F due to the impact of the Covid-19 pandemic and MCO. We also think FPC’s gestational costs will remain a drag to the company for at least the next 2 years. We estimate FY21F PATAMI to grow by 39% YoY following a recovery in sales assuming that full containment of Covid-19 Is achieved in 1HCY2021.

Source: AmInvest Research - 29 Jun 2020