We came away from MyNews’ well-attended Food Production Centre (FPC) official launching event and 3Q19 analysts briefing yesterday feeling positive about its commitment in growing the fresh food sales to stay competitive in the industry, especially with the introduction of its online convenience stores delivery services, MyNews Dash. Maintain OP with a TP of RM1.55 based on 27x FY20E EPS.

FPC to pare down losses gradually. Its Food Production Centre (FPC) has been operating for four full months since the launch of RTE commercial sales in June. Based on our the back-of-the envelope calculation, we estimated a start-up operating losses at around RM1.5m for the recent 3Q19 results operating at 33% capacity. Management is re-strategizing RTE sales to reduce wastage and raise sales volume. Note that, monthly RTE sales were steady at RM3m with wastage having been reduced from 40% initially to 20% currently, and we expect to see gradual improvement in its operating efficiencies in the upcoming quarters. If the FPC is able to reach its breakeven level at c.75% capacity (timeline undisclosed), it could potentially account for close to RM80m annually in sales with better asset turnover. On the other hand, during the 3Q19 analysts’ briefing, management disclosed that the oneoff high effective tax rate in 3Q19 (at 30.7% compared to 20.7% in 2Q19, from under provision of tax last year) was due to un-claimable expenses relating to the FPC and expect the FY19 to register an average effective tax rate of c.22% .

1st in Southeast Asia, online convenience stores delivery services. MyNews Dash delivery started just last month with delivery execution by a mix of internal staff and partnership with Grab Express which we believe serve as a good marketing strategy in boosting the fresh food volume sales and increasing brand visibility. Management noted that only marginal cost was incurred as the services operated out of 8-10 hubs initially (startup hub is Taman Tun) targeting to cover the whole of Klang Valley (undisclosed timeline) based on demand (only RM60k incurred as one-off training course for existing staff). Currently, Readyto-Eat-Foods (RTE) are served in around 304 outlets out of its 519 outlets nationwide, with 420 outlets in Klang Valley. Stores with Maru Cafés offerings are currently nonly at 150 outlets, with upcoming 50 ice cream machines ready to be installed.

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 85 net new outlets in FY19. As of 31st September 2019, Mynews has opened of 79 (net) new outlets with a base of 519 outlets.

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 - 3 Oct 2019