Investment Highlights

• We cut our FY20–22F net profit forecasts by 81%, 10% and 3% respectively, reduce our fair value by 10% to RM0.60 (from RM0.67) based on 21x revised FY21F EPS. Maintain HOLD.

• Our valuation P/E of 21x is at a discount of the average historical forward PE of 29x to reflect the weak prospect arising from the Covid-19 pandemic as well as the prolonged gestational period for the group’s food processing centre (FPC).

• Mynews’ 9MFY20 loss after tax and minority interest of RM4.1mil (PATAMI of RM28.9mil in 9MFY19) was below our and street’s full-year net profit expectations of RM15.7mil and RM9.9mil respectively. The variance was mainly due to a worse-than-expected performance during the movement control order (MCO).

• The impact from the Covid-19 pandemic has set back the turnaround period for its food FPC, prolonging the gestational period. We think that the earnings performance will start to recover in the upcoming quarter as the fullblown impact of the MCO has passed.

• Although Mynews had 59 more stores (531 stores) compared with the 472 outlets in 3QFY19, its 3QFY20 revenue fell 15% YoY (-11% QoQ) to RM110.1mil. 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 3QFY20 (based on 85% operating stores) was roughly RM235K whereas that in 3QFY19 (assuming all stores were fully operational) was RM272K, a 13% decline YoY.

• Mynews’ FPC was closed from 1 May to 14 June 2020 which hurt sales due to the lack of ready-to-eat (RTE) and baked goods offerings. This has caused a shift in product sales mix, and consumers have also shifted to low-margin offerings. The utilisation rate of its FPC was 25% at the end of June 2020 and we think that it will be challenging for the group to reach its breakeven point of 70% with the ongoing pandemic.

• 3QFY20 gross profit dropped 30% YoY (-21% QoQ) as gross margins slipped 6ppt YoY (-4ppt QoQ) to 29.5%. The group had incurred roughly RM2.5mil of wastages and stock loss. Ultimately, the impact from Covid-19 has pushed Mynews’ earnings performance further in the red in 3QFY20 with a net loss of RM6.1mil (net loss of RM2.3mil in 2QFY20).

• For 9MFY20, revenue slid 4% YoY to RM374.2mil. The drop was mainly due to the impact of Covid-19 which resulted in reduced footfall. The group’s sales were also affected by the temporary closures of outlets since the start of the pandemic. 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 begin to recover from 4QFY20F onwards. The FPC resumed production mid-June 2020 which should improve the group’s sales mix with the high-margin RTE offerings back on the shelves. We think that demand will creep back up following the easing of the MCO with the return of footfall albeit at a slower pace as the recovery MCO (RMCO) was extended until the end of the year.

• We estimate FY21F PATAMI of RM19.6mil following a recovery in sales assuming that the Covid-19 situation gradually improves. The group’s earnings performance will be dragged by its FPC as we think that the gestational costs will remain for at least the next 2 years.

Source: AmInvest Research - 30 Sept 2020