We came away feeling optimistic from the signing event of the two joint ventures, known as MyNews Kineya Sdn Bhd and MyNews Ryoyupan Sdn Bhd, which are to support Bison in-house food-processing facility expected to be completed end-CY18. Bison has also envisioned higher targeted new stores opening at c.90 new stores for FY18 (previously from, c.70 new stores), thus warranting an upgrade in our earnings assumption by 10% for FY18. Maintain OUTPERFORM with a higher TP of RM2.75.

Two joint ventures totalled RM70m in paid-up capital. MyNews Kineya Sdn Bhd (RM50m paid-up share capital) is a JV company between Bison (51%) and Gourmet Kineya Co. Ltd (49%) which is to produce ready-to-eat foods (RTE). MyNews Ryoyupan Sdn Bhd (RM20m paid-up share capital) is a JV company between MyNews Food Sdn Bhd (51%) and MRA Bakery Sdn Bhd (49%) to produce bakery products. The paid-up share capital will be used as;- (i) c.RM42m will used to construct and equip the food-processing facility, (ii) c.RM8m will used for the working capital of RTE business,(iii) c.RM20m will be used to develop, produce and sell bakery products.

Bison will bear RM35.7m in cost of investment. Bison shall have 51% equity interest in both of the JV companies with investment cost of RM35.7m which will be funded through a combination of proceeds to be raised from the proposed private placement announced on 30th August 2017 and internally generated funds. Out of the total placement proceeds (proceeds up to RM77.5m), only RM20.4m will be used towards the JV, with the balance of RM15.3m to be financed by the internally generated funds (cash at RM19.2m as of 31st July 2017).

In-house food-processing facility targeted to supply 150 stores for CY19. Bison has acquired a piece of land in Rawang measuring 1.4 acres for RM6.8m or RM113/sf (60,000 sq. ft) on 22nd July 2016 and is expected to build up to 5-level foods processing facility with built-up area of more than 130,000 sq ft (the total expected cost is RM42m). The target commencement of operation is on CY19 and expected to supply 150 stores, with subsequent roll-out to other stores (expected full capacity up to 600 stores). The 100% Halal manufacturing facility will produce affordable and quality ready-to-eat foods (RTE). As the facility is just 500m away from its existing main distribution centre, Bison is expected to benefit logistically from close proximity when the food-processing centre is completed by end-CY18.

Potential long-term growth to be unlocked. BISON is targeting to open c.70 new stores for FY17 and has revised higher its target to c.90 new stores for FY18 (as of 30th September 2017: 367 stores). Furthermore, the expected commissioning of its sub-DC in Johor by end-2017 will support the stores opening in Johor and Melaka with improvement in delivery time, and reduction in operating expenses. Additionally, with the expected completion of their in-house food- processing facility by end-CY18, and supported by the JV companies, we believe more high-margin products mix will be available.

Expecting higher earnings assumption by 10% for FY18 with the higher targeted stores opening of c.90 new stores (previously from, c.70 new stores). We made no changes to our earnings assumption for FY17 with unchanged targeted stores opening at c.70 new stores.

Maintain OUTPERFROM with a higher target price of RM2.75 (previously, from RM2.50), based on unchanged PER of 23x against FY18E EPS. Key risks include lower-than-expected opening of stores, lower–than-expected same-stores-growth and higher-than-expected operating expenses.

Source: Kenanga Research - 6 Oct 2017