1Q19 core PATAMI of RM8.2m (+30% YoY, +36% QoQ) came in within expectations at 26%/25% of our/consensus full-year earnings estimates. Looking ahead, MyNews plans to open at least 90 new outlets in FY19 (total 439 outlets as of 31st Jan 2019). However, in tandem with the increasing number of stores, MyNews will continue to incur higher operating expenses, limiting their earnings margin growth. Maintain UP with an unchanged TP of RM1.25 based on 27x FY19E EPS.

1Q19 in line. 1Q19 core PATAMI of RM8.2m (+30% YoY, +36% QoQ) came in within expectations at 26%/25% of our/consensus full-year earnings estimates. No dividend was declared for the quarter as MyNews typically pays dividend once a year in 2Q.

YoY, 1Q19 core PATAMI surged 30%, but with contraction in PBT margin by 0.5ppt to 8.3% from 8.8% in 1Q18 despite stronger sales growth (+37%) mainly due to: (i) higher operating expenses (+31%), and (ii) contraction in gross profit margin by 0.8ppt to 36.8% from 37.6% in 1Q18. The higher operating expenses were in tandem with the opening of 73 (net) new outlets since 1Q18 to 439 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, while the contraction on GP margin was due to unfavourable merchandise mix. Note that, the group’s effective tax rate of 20.7% (1Q18: 20.3%) is lower than the Malaysian statutory tax rate because one of its whollyowned subsidiaries, DKE Technology SB, is a MSC-status company which enjoys certain tax incentives.

QoQ, 1Q19 core PATAMI rose 36% in spite of lower sales growth (+13%) attributed to lower effective tax rate of 20.7% (4Q18: 23.7%) and improved PBT margin by 1.6ppt to 8.3% from 6.7% in 4Q18 due to: (i) lower operating expenses allocation at 27% (4Q18 :29%) in tandem with only 3 (net) new outlets opening, and (ii) favourable merchandise mix with higher GP margin by 0.2ppt to 36.8% from 36.6% in 4Q18, from improved contribution by new in-house brand “Maru Kafe”.

Outlook. Looking ahead, MyNews plans to open at least 90 new outlets in FY19, which is the same target as FY18 (total 439 outlets as of 31st Jan 2019). Nonetheless, we expect earnings margin growth 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 foodprocessing facility, which has been fully completed in 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 - 25 Mar 2019