Investment Highlights

• Mynews Holdings (Mynews) earnings are weighed down by higher operational costs despite seeing better product mix. Meanwhile, valuations have outpaced its growth outlook. We downgrade our recommendation to SELL from HOLD on Mynews. Our fair value is raised to RM1.31/share (from RM1.10/share previously), having rolled over our valuation period to FY19F from CY18F.

• Our valuations are pegged to an unchanged PE of 27x, which is in line with 7-Eleven Malaysia’s historical PE valuations. Apart from lofty valuations, Mynews faces intensifying competition, with Family Mart’s increasingly imposing store presence and products.

• Mynews reported a 1QFY18 core net profit of RM6.3mil (QoQ: 19.6%, YoY: -1.2%). Earnings were in line with our but below consensus estimates at 23% and 21% respectively.

• No dividend was declared as expected.

• Topline growth of 18% YoY was in tandem with Mynews’ aggressive store expansion of 19% more stores. It brought the store count to 366 stores as of end-1QFY18 (vs. 1QFY17: 307).

• Gross margins improved for the quarter against better product mix. However, operating margins deteriorated as it incurred higher cost related to beefing up its ready-to eat (RTE) and fresh food segments.

• Our expectations for Mynews going forward include: i. Topline should be well sustained by its store expansion outlook of 90 stores over FY18F. It is slated to bring YE store count to 446 stores (FY17: 356). ii. While we are buoyed by the impending completion of its food processing facility by end-CY18, it may be initially weighed by start-up costs. However in the longer run, it should command better margins. Fresh food commands GP margins of >50%. We anticipate for it to enhance overall FY19F gross margins to 37.3% against FY18F gross margins of 36.8%.

• We leave our earnings unchanged as earnings were within our estimates. Key risks to Mynews include: 1) better-than-expected product offerings to spur in-store sales; and 2) an acceleration in store expansion.

Source: AmInvest Research - 27 Mar 2018