9M19 core PATAMI of RM23.7m (+16% YoY) came in within expectations at 74%/73% of our/consensus full-year earnings estimate. The commercial production of its inhouse food processing centre has started in stages from July 2019 and we believe margins for the merchandise mix will gradually improve after the promotional discount period ends. No changes to our FY19-20E CNP and our TP of RM1.55 is based on 27x FY20E EPS. Maintain OP.

9M19 within expectations. 9M19 core PATAMI of RM23.7m (+16% YoY) came in within expectations at 74%/73% of our/consensus fullyear earnings estimate. No dividend was declared for the quarter, as expected. MyNews typically pays dividend once a year in the 2Q. We are not expecting any dividend in the forthcoming quarters.

YoY, 9M19 core PATAMI surged 16%, but with contraction in PBT margin by 1.4ppt to 7.4% from 8.8% in 9M18 despite stronger sales growth (+38%) mainly due to higher cost of sales (+43%) which reduced gross profit margin by 2.4ppt to 35.7% from 38.1% in 9M18. The contraction on GP margin was due to price discounts offered to promote and drive the sales of in-house RTE food and beverages as well as unfavorable merchandise mix. Operating expenses was also higher (+27%) in tandem with the opening of 68 (net) new outlets since 9M18 to 472 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. Note that the group’s effective tax rate of 23.7% (9M18: 17.9%) 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, 3Q19 core PATAMI decreased by 7% in spite of marginal drop in sales (-1%), during the fasting month, mainly from contraction in PBT margin by 1.2ppt to 6.4% from 7.6% in 2Q19 due to higher operating expenses (+5%) in tandem with the opening of 16 (net) new outlets. Effective tax rate was also higher at 30.7% (2Q19: 20.7%) from underprovision of tax last year. This was despite better merchandise mix with higher GP margin by 0.6ppt to 35.6% from 35.0% mainly from the food and beverages, and tobacco categories.

Outlook. Competitively priced, fresh (shelf life that ranges from 1 day to 3) and a range of food offering that fits the local palate to the tee are main reasons why we think MyNews’ venture into convenient ready-toeat 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) double-digit earnings growth (c.20% vs. SEM of c.7%), and (ii) aboveindustry earnings margin (c.7% vs. SEM of c.2%).

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

Source: Kenanga Research - 27 Sept 2019