1QFY20 CNP of RM4.4m (-47%) came in below both our/consensus expectations at 15% each of full-year earnings estimate, mainly due to higher-than-expected losses at the 51%-owned FPC (food processing centre). And, losses at this subsidiary which could not offset taxable income elsewhere resulted in higher-than-expected effective tax rate for the group. Hence, we cut FY20E-FY21E CNP by 44%-34% to reflect the higher-continued losses at FPC and to factor in lower stores opening and cautious spending during the Covid-19 outbreak. We also cut our TP to RM0.550 (from RM1.10), based on lower 19x FY20E EPS, -2.0SD (from 25x FY20E EPS, - 1.0SD). Downgrade to UP (from MP) as we believe that MYNEWS need a longer time for FPC to break even.

1QFY20 below expectations.1QFY20 CNP of RM4.4m (-47%) came in below both our/consensus expectations at 15% each of full-year earnings estimate, due to higher-than-expected losses at FPC. As these losses were not offset-able against taxable income elsewhere, the effective tax rate exceeded expectation. No dividend was declared as MyNews typically pays dividend once a year in the 2Q.

YoY, 1QFY20 core PATAMI plunged 47%, as the FPC which recorded a loss of RM2.68m for the current quarter was not yet operating a year ago. Higher depreciation expense by RM2.2m contributed to sharply increased ‘other expenses’ which increased from RM2.7m a year ago to RM12.6m, while interest expense by some RM0.5m. As a result, PBT margin fell from 8.3% a year ago to 3.6% even as sales grew 14% due to increase in number of outlets by 96 (net) to 535 from a year ago and increase in RTE and bakery offerings. Gross profit margin contracted by 1.3ppt to 35.5% from 36.8% in 1QFY19 due to change in the sales mix, price discounts offered to promote and drive the sales of in-house ready-to-eat (RTE) food and the expected high wastages at the initial roll out of the RTE food.

QoQ, 1QFY20 core PATAMI surged 37% despite marginal increase in sales (+1%), mainly from higher PBT margin by 0.6ppt to 3.6% from 3.0% in 4QFY19 due to: (i) better management of operating expenses, and (ii) expansion on GP margin by 1.0ppt to 35.5% from 34.5% in 4QFY19 with better merchandise mix. Effective tax rate was also lower at 40.3% (4QFY19: 49.4%).

Outlook. The food processing centre (FPC) is currently running at about 50% capacity and recorded losses of RM2.7m for the 1QFY20 and we expect the losses to expand during this outbreak from low demand for premium fresh food selections. Whilst MyNews recognizes the increasingly competitive convenience retail landscape and the challenges faced in introducing ready-to-eat food (RTE) similar to the Japan’s konbinisto’s experience in meeting the increasing consumer expectations and fast consumption trend, it remains optimistic of its business growth, sustainability and potential driven by its continuous network expansion. Given the current situation, MyNews is closely monitoring the current weak market sentiments caused by Covid-19 pandemic and economic uncertainties.

Cut FY20E-FY21E CNP by 44%-34% to reflect the higher-than-expected effective tax rate and to factor in lower stores opening during the Covid-19 outbreak year as well as cautious spending during the two-week movement restriction.

Downgrade to UP from MP on lower TP of RM0.550 (from RM1.10), based on lower 19x FY20E EPS at -2.0SD of its 3-year historical mean PER (from 25x FY20E EPS, at -1.0SD of its 3-year historical mean PER) on back of cautious spending during this economic uncertainties. Risks to our call include: (i) higher-than-expected sales, and (ii) lower-thanexpected operating expenses.

Source: Kenanga Research - 23 Mar 2020