Investment Highlights

• We upgrade our SELL recommendation on MyNews Holdings (MyNews) to a BUY with a higher fair value of RM1.24/share. Our valuation is based on a 1-year average historical forward PER of 29x FY22F EPS (vs. 21x previously). Our previous PE of 21x was to reflect the impact of the Covid-19 pandemic on its earnings. There is no adjustment for ESG based on our 3-star rating.

• Also, we believe that the 44.9% fall in MyNews’ share price from the two-year high of RM1.47 on 8 July 2019 has already reflected the start-up losses of its food processing centre (FPC). The FPC posted a loss after tax of RM12.4mil in FY20. We believe that the FPC will make smaller losses of roughly RM4.0mil in FY21F, before breaking even in FY22F.

• The opening of CU stores is seen as the MyNews’ most prominent driver of growth. However, we believe that its effect as a catalyst to MyNews’ pre-existing stores is vastly overlooked. The synergistic dynamic between two convenience store franchises is something worth considering.

• At its core, CU stores provide flexibility by removing the restrictive growth trajectories of MyNews stores. It does this by acting as a separate channel to offload FPC produce. This leaves MyNews outlets with less pressure on their fresh food segment to perform.
   
• We foresee two core benefits:

1. MyNews does not have to bear the brunt of its A&P expenses to promote its fresh food range. Instead, it can focus on making collaborative efforts that have higher drawing power, much like 7-Eleven.

• Given MyNews’ lack of recent collaborations, we believe that collaborators prefer campaigns involving well established brands such as FMCG goods instead of a fledgling fresh food segment;

• Collaborators such as pop culture icons, e-wallet providers and famous brands are crucial in drawing in specific customer segments;

• Opting for such a strategy also helps MyNews capture customer bases distinct from CU’s;

• Additionally, collaborative and aggressive A&P campaigns give older outlets, which are not equipped with fresh food facilities. some competitive power;

• Currently, MyNews’ adverts are largely focused on cost savings and its loyalty programme instead. We think the priority should be to offload as much fresh food as possible from the underperforming FPC;

• Hence, a reason MyNews performed so badly compared to its peers during the pandemic was not merely because of high FPC gestational costs and poor food uptake, but because it sacrificed its drawing power to promote its food brand. With the coming of CU stores and the pandemic recovery, MyNews no longer has to play catch-up.

2. The group has flexibility in developing outlets with different convenience store models.

• In populous areas, the group can opt to open smaller stores that may not have sufficient space for fresh food facilities. This comes with lower set-up costs;

• It can open models that adjust to changing consumer trends and preferences. These include food kiosks, mini grocery stores as well as health-centric or artisan outlets;

• The group is already experimenting with different store types. MyNews Supervalue, a larger store which focuses on day-to-day essential items, was recently opened. This appeals to a population that values geographical proximity and avoiding crowded supermarkets.

• Again, such models allow MyNews to draw in customers with needs distinct from that of CU’s.

• For FY21F, MyNews will still face poor footfall and prolonged gestational costs from the FPC. In a longer term however, we strongly believe that MyNews will be a force to be reckoned with. We like the CU partnership as well as synergistic benefits it offers to the existing MyNews outlets.

Source: AmInvest Research - 22 Mar 2021