1HFY20 core PATAMI of RM2.0m (-88% YoY) came in below our/consensus expectations at 9%/10% of full-year earnings estimate, due to lower-than-expected sales and lower-than expected gross margin. Hence, we cut FY20E/FY21E CNP by 77%/29%. Maintain UNDERPERFORM with a lower TP of RM0.480 (from RM0.550), based on roll-over base of FY21E EPS (from FY20E EPS), on unchanged PER of 18x at -2.0SD of its 3-year historical mean PER.

1HFY20 below expectations. 1HFY20 core PATAMI of RM2.0m (-88% YoY) came in below our/consensus expectations at 9%/10% of full-year estimate, due to lower-than-expected sales and lower-than-expected gross margin. No dividend was declared, as MyNews typically pays dividend once a year.

YoY, 1HFY20 core PATAMI plunged 88% affected by the temporary closure of 30% of outlets at selected locations and decrease in daily sales at outlets that remained open, as a result of the MCO imposed by the Government effective 18th March 2020. This was worsened by the higher food processing centre (FPC) operating costs which recorded a loss of RM2.8m affected by the fluctuation in sales. Gross profit margin contracted by 1.3ppt to 34.5% from 35.8% in 1HFY19 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 products. Note that, the higher sales (+3%) was only contributed by the strong 1QFY20, and supported by the increase in number of outlets by 83 (net) to 539 from a year ago and saving on operating expenses (-6%) derived from costs optimization initiatives particularly during the MCO period.

QoQ, 2QFY20 core PATAMI plunged into the red with net loss of RM2.3m due to the closure of 30% of the outlets at selected locations during MCO and cautions consumer sentiment, as mentioned above.

Outlook. The FPC is currently running below 50% capacity and recorded losses of RM2.8m in the 1HFY20 and we expect the losses to expand during this outbreak from low demand for premium fresh food selections. In view of the uncertainties in the economic landscape due to the pandemic, MyNews is taking a cautious approach in moving forward with continuous efforts placed to increase efficiencies and optimise costs and aligning its business strategies to the “new normal”, repositioning itself to stay competitive and agile in facing the uncertainties.

Cut FY20E/FY21E CNP by 77%/29% to reflect the lower-than expected sales and lower-than-expected gross margin.

Maintain UNDERPERFORM with a lower TP of RM0.480 (from RM0.550), based on roll-over base of FY21E EPS (from FY20E EPS), on unchanged PER of 18x at -2.0SD of its 3-year historical mean PER. We expect a better FY21 on some degree of recovery post-MCO period. Nonetheless, we expect MyNews’s efforts to gain market share to continue being challenged by competitors especially from the new comers with their innovative fresh products.

Risks to our call include: (i) higher-than-expected sales, and (ii) higher-than-expected gross margin.

Source: Kenanga Research - 29 Jun 2020