FY18 core PATAMI of RM26.5m (+10%) came in within expectations at 95%/93% of our/consensus full-year earnings estimates. In tandem with the increasing number of stores, MyNews continued to incur higher operating expenses. Looking ahead, MyNews plans to open c.70 new outlets in FY19, which is lower than the 90 new outlets in FY18 (total 436 outlets as of 31st Oct 2018). Maintain UNDERPERFORM with an unchanged TP of RM1.25 based on 27x FY19E EPS.

FY18 within expectations. FY18 core PATAMI of RM26.5m (+10%) came in within expectations at 95%/93% of our/consensus full-year earnings estimates. No dividend was declared for the quarter as MyNews typically pays dividend once a year in the 2Q, which bring fullyear DPS to 1.0 sen (FY17:1.0 sen).

YoY, FY18 core PATAMI increased only by 10%, with contraction in NP margin by 0.5ppt to 6.8% from 7.3% in FY17 despite a surge in revenue (+20%) mainly due to higher operating expenses (+30%). Gross profit margin, however, improved by 0.9ppt to 37.7% from 36.8% in FY17 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 80 (net) new outlets to 436 stores 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 19.3% (FY17:21.7%) is 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, 4Q18 core PATAMI plunged 17% in spite of higher revenue (+12%) mainly due to: (i) higher effective tax rate of 23.7% (3Q18: 12.7%), (ii) higher operating expenses (+13%) in tandem with the opening of 32 (net) new outlets, and (iii) unfavourable merchandise mix with lower GP margin by 1.5ppt to 36.6% from 38.1% in 3Q18, despite the launching of new in-house brand “Maru Kafe” in the quarter.

Outlook. Looking ahead, MyNews plans to open c.70 new outlets in FY19, which is lower than the 90 new outlets addition in FY18. Nonetheless, we expect earnings margin to be limited by: (i) higher staff and rental costs during this expansionary period, and (ii) start-up costs from the commissioning of in-house food-processing facility, which is expected to be fully completed by January 2019 (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 27x FY19E EPS, which is in line with regional peers’ average PER, given the stiff competition and saturated market in the modern convenience stores space, directly related to the regional market trend.

Key risks to our call include higher–than-expected sales, and lowerthan-expected operating expenses.

Source: Kenanga Research - 17 Dec 2018