1Q18 net profit of RM6.3m (-0.3% YoY) came in below expectations at 17%/20% of our/consensus full-year forecasts due to higher-than-expected operating expenses. As such, we cut our FY18E/FY19E NP by 23% /21%. Downgrade to UNDERPERFORM from MARKET PERFORM with a lower TP of RM1.25 from RM1.45.

1Q18 below expectations. 1Q18 net profit of RM6.3m (-0.3% YoY) came in below expectations at 17%/20% of our/consensus full-year forecasts due to the higher-than-expected operating expenses. No dividend was declared for the quarter, as expected.

YoY, 1Q18 net profit decreased marginally by 0.3% despite higher revenue (+18%) mainly due to the higher operating expenses (+32%) from higher staff and rental costs. The higher operating expenses were in tandem with the increase in the number of outlets to 366 stores compared to 307 stores in 1Q17 as well as its maiden foray into the ready-to-eat food and bakery projects. Note that, the Group’s effective tax rate of 20.3% (1Q17:21.0%) is lower than the Malaysian’s statutory tax rate because one of its wholly-owned subsidiaries is a MSC status company which enjoys certain tax incentives.

QoQ, 1Q18 net profit surged 20% in spite of marginal 1% increase in sales underpinned by: (i) expansion in gross margin by 2.0ppt to 37.6% from 35.6% in 4Q17 from the better products mix as well as maiden contributions from the high-margin ready-to-eat food and bakery projects, and (ii) lower effective tax rate at 20.3% (4Q17:22.9%). MyNews opened 10 new stores for the quarter which contributed to the 5.1% QoQ increase in operating expenses.

Outlook. Looking ahead, MyNews plans to open c.90 new outlets for FY18, which is higher than the 70 newly opened outlets in FY17 (as of 30th October 2017: total 356 outlets with additional 70 MyNews outlets, 3 new MH Smith outlets and closure of 8 underperforming outlets). Nonetheless, we expect the earnings momentum to be subdued due to higher staff and rental costs during this expansion period as well as start-up costs from the commission of in-house food-processing facility, which is expected to be completed by end-CY18 (supported by its JV companies, MyNews Kineya Sdn Bhd and MyNews Ryoyupan Sdn Bhd).

Cut FY18-19E NP by 23-21%. We cut our FY18E and FY19E net profit by 23% and 21%, respectively, as we have factored in the higher-thanexpected operating expenses.

Downgrade to UNDERPERFORM with a lower TP of RM1.25. As such, we cut our TP to RM1.25 from RM1.45 based on the revised 26x FY19E EPS as we change our valuation year to FY19E to factor in the potential earnings impact for its new in-house food processing facility (previously from 26x CY18E EPS). Our ascribed PER of 26x is in line with its average regional peers. Downgrade to UNDERPERFORM from MARKET PEFORM.

Key risks include lower-than-expected operating expenses, and higher– than-expected sales.

Source: Kenanga Research - 27 Mar 2018