Investment Highlights

• We maintain our HOLD recommendation for Mynews Holdings (Mynews) with an unchanged FV of RM0.67. Our valuation is pegged to a PE of 21x FY21F EPS.

• The key takeaways from the results briefing call are as follows: 1. The food processing centre (FPC) restarted operations on 14 June 2020 with utilisation rate now at 25%. 2. Average ticket size surged to roughly RM13 per transaction, compared with RM7 pre-MCO. 3. Sales mix was unfavourable during the movement control order (MCO), which resulted in lower gross margin. 4. Online sales surged 300% in 2QFY20 from a low base in 1QFY20. 5. 3QFY20F outlook remains uncertain as footfall recovery is still in its early stages.

• Mynews’ FPC restarted operations on 14 June 2020 after closing on 1 May 2020. The utilisation rate is now at 25% (45% pre-MCO). The group is planning on gradually building up the utilisation rate again. However, we think that it will be challenging to reach the 70% breakeven point by the end of this year.

• The group is ramping up its effort in cost optimization of its FPC as they reduce product offerings putting more emphasis on each product offerings to tailor to customers’ preference. The group is managing its logistics and manpower activities and expects to see a reduction in costs for these.

• Average ticket size surged to roughly RM13 per transaction during the MCO, compared with RM7 pre-MCO (RM9 for stores with RTE offerings). However, group sales were lower due to lower footfall during the period. However, footfall is gradually recovering and the group estimates full recovery by end-2020.

• Sales mix was unfavourable during the MCO which resulted in lower gross margin. Tobacco sales rose 5% during the MCO while sales of fresh food dropped. Fresh food sales mix was lower at 13% compared with 15% pre-MCO.

• Online sales surged 300% in 2QFY20 from a low base in 1QFY20. Mynews now have 71 distribution points. Around 70K orders were delivered during the MCO.

• Earnings performance for 3QFY20F remains uncertain as the recovery in demand is still in its early stages. Footfall is gradually improving with the easing of the MCO which bodes well for the group.

• Moving forward, we think Mynews’ earnings performance will remain subdued in 3QFY20. The group’s FPC closed temporarily 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 fetch a higher margin. However, we think that following the easing of the MCO, footfall will gradually return and demand will slowly creep up. Hence, we think that the group’s earnings will recover in 2H2020.

• 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 on the company’s operating profit margins for the next two years. We estimate FY21F PATAMI to grow by 39% YoY on the back of a recovery in sales, assuming that Covid-19 is fully contained by 1HCY2021.

Source: AmInvest Research - 30 Jun 2020