Its 9MFY20 results plunged into the red with core loss of RM4.1m compared to core profit of RM23.7m in 9MFY19 which tracked below our/consensus core profit expectation for the full year of RM5.1m/RM9.9m, respectively, due to lower-than-expected sales and gross margin. As such, we cut FY20E earnings to core loss of RM9.5m from core PATAMI of RM5.1m. Maintain UNDERPERFORM with an unchanged TP of RM0.480, based on 18x FY21E EPS (-2.0SD of its 3-year historical mean PER).

9MFY20 below expectations. Its 9MFY20 results plunged into the red with core loss of RM4.1m compared to core profit of RM23.7m in 9MFY19 which is below our/consensus core profit expectation at RM5.1m/RM9.9m, respectively due to lower-than-expected sales and gross margin. No dividend was declared for the quarter, as expected.

YoY, 9MFY20 plunged into the red with core loss of RM4.1m compared to core profit of RM23.7m in 9MFY19 affected by the temporary closures of 30% of outlets at selected locations in 1HFY20 and decrease in daily sales at outlets, impacted by MCO imposed by the government from 18th March 2020, and immediately followed by RMCO which was recently extended till 31 December 2020. This was worsened by the higher food processing centre (FPC) operating costs which recorded a loss of RM8.0m affected by the fluctuation in sales. Gross profit margin contracted by 2.7ppt to 33.0% from 35.7% in 9MFY19 due to change in the sales mix to lower-margin products, and price discounts offered to promote and drive the sales of in-house ready-to-eat (RTE) food. Note that, the slower decline in sales (-4%) was supported by higher stores base of 531 stores compared to 472 stores for the same period last year.

QoQ, 3QFY20 core loss expanded to RM6.1m from core loss of RM2.3m in 2QFY20 due to decrease in daily sales at outlets (-11%), worsened by losses at its food processing centre (FPC) at RM2.5m (2QFY20: loss of RM2.8m) due to reasons mentioned above. The FPC halted production for six weeks from 1st May 2020 to 14th June 2020 which resulted in a small saving in operating costs. This action was deemed necessary as the uncertain and fluid market environment caused erratic and huge fluctuation in day-to-day sales which made the production planning difficult and products wastages high.

Outlook. The FPC is currently running below 50% capacity and recorded net loss of RM8.0m in 9MFY20 and we expect the losses to expand during this outbreak due to 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 earnings to core loss of RM9.5m from core PATAMI of RM5.1m to reflect the lower-than-expected sales and gross margin.

Maintain UNDERPERFORM and TP of RM0.480, based on 18x FY21E EPS (-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’ efforts to grow market share to be continually challenged by competitors especially from the newcomers 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 - 30 Sept 2020