1H18 net profit of RM13.2m (+4.8% YoY) came in within expectations at 47%/45% of our/consensus full-year earnings forecast. MyNews continued to be hit by higher operating expenses in tandem with the increasing number of stores. Maintain UNDERPERFORM with unchanged TP of RM1.25 based on 26x FY19E EPS.

1H18 within expectations. 1H18 net profit of RM13.2m (+4.8% YoY) came in within expectations at 47%/45% of our/consensus full-year earnings forecast. DPS of 1.0 sen was declared for the quarter, as expected (1H17: 1.0 sen). MyNews typically pays its dividend once a year in the 2Q.

YoY, 1H18 net profit increased by 5% to RM6.8m despite a surge in revenue (+19%) mainly due to the higher operating expenses (+28%) from higher staff and rental costs. The higher operating expenses were in tandem with the increase in the number of outlets to 385 stores compared to 325 stores in 1H17. Note that the Group’s effective tax rate of 20.6% (1H17:19.7%) is lower than the Malaysian statutory tax rate because one of its wholly-owned subsidiaries is a MSC status company which enjoys certain tax incentives.

QoQ, 2Q18 net profit rose 8% in spite of a 5% increase in sales underpinned by the expansion in PBT margin by 0.4ppt to 9.2% from 8.8% in 1Q18 due to better product mix as well as contributions from the higher margin ready-to-eat food and bakery products. Note that, MyNews opened 19 net new stores for the quarter.

Outlook. Looking ahead, MyNews plans to open c.90 new outlets in FY18, which is higher than the 70 new outlets in FY17 (as of 30th April 2018: total 385 outlets with additional 29 net new MyNews outlets). Nonetheless, we expect the earnings momentum to be subdued by the higher staff and rental costs during this expansion period as well as start-up costs from the commissioning 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).

Maintain UNDERPERFORM with an unchanged Target Price of RM1.25 based on 26x FY19E EPS, which is in line with regional peers’ average valuation. Key risks to our call include higher–than- expected sales, and lower-than-expected operating expenses.

Source: Kenanga Research - 21 Jun 2018