We expect Mynews to rebound in FY23 and continued its earnings growth premised on (i) recovery prospect with footfall normalization; (ii) CU expansion that would improve food processing centre (FPC) utilization; (iii) ample capacity in FPC to expand on new product launches with; and (iv) complimentary omni channel strategy to tap into wider population. We derive a fair value of RM0.81, based on 30x PE multiple pegged to FY23f EPS. This valuation multiple is -1SD below its 4-year pre-pandemic historical mean P/E of 35x.

Background. Mynews was listed on the Main Market of Bursa Malaysia on 29 March 2016. The group has a total of 560 stores across four brands of Mynews, Mynews Supervalue, CU and WH Smith.

Recovery prospect with footfall normalization. Following the country’s move to the endemic phase since 1 April, we gather that retail foot traffic is recovering at an encouraging pace. We opine that the promising business environment would provide further boost towards our retail players with (i) the absence of restrictions; (ii) longer operating hours for CVS allowed to operate 24 hours; (iii) permission for social activities (i.e. sports, pubs, bars) to operate pass midnight that could have a spill over effects for Mynews 24 hours operations.

“CU” on the bright side. CU’s entry with its first maiden store in Centrepoint Bandar Utama on April 2021, introduced a South Korean convenience store’s brand to Malaysia. The CU brand focuses on fresh food segment as well as beauty products and FMCG goods from South Korea. This provides an edge with the strategy of tapping in the niche market, as restaurants and delivery platform have limited alternatives for fresh grab-to-go Korean food segment. With c.65% of the selection focusing on fresh food segment, we opine that this would be the earnings driver. Note that fresh food segment typically garnered higher margin than others.

Ample capacity to expand on higher margin products. The food processing centre (FPC), launched in the second half of 2019, had not reached the economies of scale when the pandemic hit, thereby affecting its progress in the production level as the volume of retail sales was declining. The FPC currently runs at 55% utilisation rate. Spanning over 130k sqft, we gather that there is ample of space for further innovation and launches of new products. Additionally, with aggressive roll out of CU stores, we opine that the utilization rate of FPC would be able to ramp up at a faster pace. Management shared that FPC would be able to reach breakeven level at 70% utilization by end of 2022, which is well on track.

Product launches to cater to various segment of the population. Mynews latest ready-to-eat (RTE) “Ichi QQ” brand with 5 SKUs are available across c.200 stores. With a lower price point of RM1.99 (vs the Maru brand of RM2.90-7.90), we view this as a good strategy to tap into wider population of the market.

Omnichannel strategy. Apart for expanding its footprint, Mynews is also embarking on the journey to ramp up its omni-channel strategy in line with the shifting in consumer behaviour. We opine that with the complementary online medium would enable Mynews to tap into wider segment of customers. Additionally, Mynews also are known for its strong brand equity in the membershi p program loyalty with current registered members at a total of 500k.

Fair value of RM0.81. We derive a fair value of RM0.81, based on 30x PE multiple pegged to FY23f EPS. This valuation multiple is -1SD below its 4-year pre-pandemic historical mean P/E of 35x. Our fair value implies a FY22f P/B of 2.6x which is roughly -0.5SD below its 5-years historical P/B of 3.0x

Source: Hong Leong Investment Bank Research - 20 Apr 2022