We came away from MyNews’ well-attended company briefing yesterday positive about its entry into fresh food offerings in staying competitive among convenience stores. While new store openings will drive growth, it will be enhanced further with the introduction of ready-to-eat food and the new Maru Café offerings. With an EPS CAGR of 21% over the next two years, this growth stock deserves to trade at a premium to market and peers. We peg its target price at RM1.55 placing it on a 1-year fwd PER of 27x. Reiterate OP.

Zooming in the 1H19 results. YoY, 1H19 core PATAMI surged 23%, while PBT margin contracted by 1.0ppt to 8.0% from 9.0% in 1H18 on stronger sales growth (+39%). Gross profit margin contracted by 2.3ppt to 35.8% from 38.1% in 1H18 due to lower sales mix margin, which skewed towards lower margin tobacco sales (34% sales from 31% of sales, previously and c.10% of gross profit) especially from introduction of ICOS (heated tobacco), with lower percentage sales contribution from food & beverages (c.40% sales, 40% of gross profit) . The stronger sales were mainly on account from the higher stores base of 456 stores compared to 385 in 1H18. We project gross profit margin to stay at c.36% over the next two years as it ramps up supply of new in-house food offerings.

In-house food processing centre commenced delivery. Management prides itself as having the first central processing kitchen facility in the country - 120k sf - located in the vicinity of MyNews HQ in Kota Damansara. Just completed, commercial production commenced in stages starting 11th June 2019. The in-house processing plant production is supported by its JV companies targeting to supply to 300 stores, eventually rising to a maximum capacity for 600 stores. Barely a year in operations, the Maru Cafes have showed encouraging growth. The 90 stores where Maru Cafés are currently located have registered +19% growth in outlet sales, +15% in customer count and +13% basket size. Annual depreciation of the new plant at a rate of RM1.5m per year (for its 51% JV stake, up to estimated 10 years) has been factored into our forecast. MyNews Kineya SB (RM25m paid-up share capital, equipment cost RM16m) is a JV company between MyNews Food SB (51%) and Gourmet Kineya Co. Ltd (49%) which is to produce ready-to-eat foods (RTE). MyNews Ryoyupan SB (RM20m paid-up share capital, equipment cost RM13m) is a JV company between MyNews Food SB (51%) and MRA Bakery SB (49%) to produce bakery products.

Outlook. Competitively priced, fresh (shelf life ranges from 1 day to 3) and a range of food offering that fits the local palate to the tee are reasons why we think MyNews venture into convenience ready-to-eat food stands a good chance of succeeding. This new product range and revamping stores to increase sales are keys to raising the asset turnover and hence we are likely to see improvements in ROE going forward. There are plans to open at least 80 net new outlets in FY19, which is the same target as FY18 (total 456 outlets as of 31st April 2019).

Maintain OUTPERFORM with unchanged TP of RM1.55 based on 27x FY20E EPS, at -1.0SD of its 3-years historical mean PER, also in line with regional peers’ average PER. We like MYNEWS for its (i) doubledigit 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 - 26 Jun 2019