9M18 Net Profit of RM20.4m (+9% YoY) came in within expectations at 73%/70% of our/consensus full-year earnings estimates. In tandem with the increasing number of stores, MyNews continued to incur higher operating expenses. We also expect 4Q18 sales to be negatively affected by higher tobacco prices (c.33% of total revenue) following implementation of the new SST. Maintain UNDERPERFORM with unchanged TP of RM1.25 based on 26x FY19E EPS.

9M18 within expectations. 9M18 Net Profit of RM20.4m (+9% YoY) came in within expectations at 73%/70% of our/consensus full-year earnings estimates. MyNews typically pays dividend once a year in the 2Q. We are not expecting any dividend in the forthcoming quarter.

YoY, 9M18 Net Profit increased only by 9%, with contraction in NP margin by 0.7ppt to 7.2% from 7.9% in 9M17 despite a surge in revenue (+19%) mainly due to higher operating expenses (+29%). The group’s gross profit margin, however, improved by 1.0ppt to 38.1% in 9M18 from 37.1% in 9M17 due to better merchandise mix, especially from the expansion of its fresh foods offering to more outlets. The higher operating expenses were in tandem with the opening of 66 (net) new outlets to 404 stores compared to 338 stores in 9M17 as well as higher staff costs, rental expenses, and expenses incurred for the bigger Head Office premises (at Taman Sains, Kota Damansara) and the new Johor Bharu Distribution Centre. Note that, the group’s effective tax rate of 17.9% (9M17:20.7%) was much lower than the Malaysian statutory tax rate because one of its wholly-owned subsidiaries, DKE Technology SB is a MSC-status company which enjoys certain tax incentives.

QoQ, 3Q18 Net Profit rose 6% in spite of lower revenue growth of 4% mainly due to the lower effective tax rate of 12.7% (2Q18: 20.9.%). 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 July 2018: total 404 outlets with additional 66 net new MyNews outlets). Nonetheless, we expect earnings margin to be eroded by: (i) higher staff and rental costs during this expansionary period as well as (ii) 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). Additionally, with higher tobacco prices following implementation of the new SST, we expect slower sales for MyNews as the group’s three major suppliers are tobacco players (New Foo Hing Sdn Bhd (BAT products), Lein Hing Enterprise (PMI products), and CSS Tobacco (JTI products)), which make up c.40% of the group’s total purchases and c.33% of total revenue.

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–thanexpected sales, and lower-than-expected operating expenses.

Source: Kenanga Research - 25 Sept 2018