Investment Highlights

• We downgrade our call on Mynews Holdings (Mynews) to HOLD (from BUY) with a lower fair value (FV) of RM0.77 (from RM1.18 previously), based on an unchanged FY23F PE of 29x, on par with its pre-pandemic 3-year average (FY17–19).

• We turn cautious on the prospect of the CU brand becoming profitable in the near term. The gestational period is likely to be longer than our initial expectation as high operating expenditure is likely to persist and improvement of gross margin is expected to be more gradual.

• We reverse our FY22F earnings to a net loss of RM5.7mil (from a net profit of RM5mil) while cutting FY23F earnings by 35% and FY24F earnings by 26%, after imputing higher operating cost assumption.

• Operating cost of the CU brand is expected to remain elevated as Mynews plans to maintain its investment in promotional activities and marketing efforts as part of a brand-building strategy. This raises uncertainty over the timeline of the CU brand turnaround, which we previously expected to materialise as early as 2HFY22.

• Gross margin improvement is also likely to be more gradual as the company may need time to fine-tune its offerings to lower the percentage of imported products. While 60% of CU outlets’ sales are attributed to food & beverage items, 45% of them are imported from South Korea with the more expensive merchandise limiting the margin’s upside potential.

• Nevertheless, the company remains a beneficiary of the economic recovery. As of 1QFY22, footfalls have reached 80% of the pre-pandemic level and we expect this to gradually improve, albeit at a much slower pace. The normalisation of the stores’ hours starting 1 April would also bolster sales.

• Driven by demand recovery, Mynews’ food processing centre utilisation rate rose to 55% in 1QFY22 (from 45% in 4QFY21) and is on track to reach the 70% breakeven level in 2HFY22.

• Moving forward, the company maintains its strategy of focusing on growing the CU and Mynews Supervalue franchises. With 20 net additional stores YTD, Mynews is set to meet its target of 100 new outlets per annum.

• Key risks to its earnings are: i) stiff competition within the convenience store space which could further prolong CU’s gestational period; and ii) inflationary environment which could negatively affect Mynews’ cost structure and demand for its products. The stock currently trades at a fair FY23F PE of 27x, near its 3-year pre-pandemic average, and offers a listless dividend yield of 1%.

Source: AmInvest Research - 29 Mar 2022