1H19 core PATAMI of RM16.2m (+23% YoY) came in within expectations at 51%/50% of our/consensus full-year earnings estimates. The commercial production of its in-house food processing centre has just started in stages (delayed from targeted 1Q19). The share price has plunged 11% since our last UP call, and we believe that the negatives have been priced in. Upgrade to OP from UP with a higher TP of RM1.55 from RM1.25, based on 27x FY20E EPS (roll-over from FY19E).

1H19 within expectations. 1H19 core PATAMI of RM16.2m (+23% YoY) came in within expectations at 51%/49% of our/consensus fullyear earnings estimates. DPS of 1.0 sen was declared for the quarter, as expected (1H18: 1.0 sen). MyNews typically pays its dividend once a year in the 2Q. We are not expecting any dividend in the forthcoming quarters.

YoY, 1H19 core PATAMI surged 23%, but with contraction in PBT margin by 1.0ppt to 8.0% from 9.0% in 1H18 despite stronger sales growth (+39%) mainly due to: (i) higher operating expenses (+28%), and (ii) contraction in gross profit margin by 2.3ppt to 35.8% from 38.1% in 1H18. The higher operating expenses were in tandem with the opening of 98 (net) new outlets since 1H18 to 483 stores as well as higher staff costs, rental expenses, and expenses incurred for the bigger Head Office premises and food processing centre (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% (1H18: 20.6%) 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, 2Q19 core PATAMI decreased by 2% in spite of stronger sales (+8%) mainly from contraction in PBT margin by 0.7ppt to 7.6% from 8.3% in 1Q19 due to: (i) higher operating expenses (+2%) in tandem with the opening of 44 (net) new outlets, and (ii) unfavourable merchandise mix with lower GP margin by 1.8ppt to 35.0% from 36.8%.

Outlook. Looking ahead, MyNews plans to open at least 90 new outlets in FY19, which is the same target as FY18 (total 483 outlets as of 31st

April 2019). The new in-house food-processing facility in Kota Damansara has been completed in early June 2019, whereas commercial production commenced in stages starting 11th June 2019. The in-house processing plant is supported by its JV companies, MyNews Kineya Sdn Bhd and MyNews Ryoyupan Sdn Bhd. We believe that the merchandise mix will gradually shift towards better margin mix with the commencement of its in-house food-processing centre.

Upgrade to OUTPERFORM from UNDERPERFORM with a higher TP of RM1.55 from TP of RM1.25 as we roll-over our valuation year to FY20E EPS (from FY19E) based on an unchanged targeted PER of 27x, at -1.0SD of its 3-years historical mean PER, also in line with regional peers’ average PER. The share price has plunged 11% since our last downgrade to UP, and we believe that the negatives have been priced in. We like MYNEWS for its (i) double-digit earnings growth (c.20% vs SEM’s at c.7%), and (ii) above-industry earnings margin (c.7% vs SEM’s at c.2%).

Key risks to our call include: lower–than-expected sales, and higherthan-expected operating expenses.

Source: Kenanga Research - 24 Jun 2019