MyNews will be bringing in Korea’s leading consumer value store (CVS) brand CU to Malaysia, with the first store expected to be rolled out by early CY21. All-in, we are cautious over this move, mainly due to the likely cannibalisation between CU and Mynews outlets, as well as the prevailing execution risks for the expansion of a new brand (on top of its Maru Café expansion plans which have yet to show promising results). UP call with TP of RM0.480 maintained.

Bringing Korean CVS stores - CU to you. The group signed a license agreement with BGF Retail Co., Ltd yesterday with the latter being the operator and owner of South Korea’s leading convenience store brand CU which has more than 15,000 stores in South Korea. This agreement will essentially allow the group to operate and sub-franchise CU outlets in Malaysia for a period of 10 years, with an additional renewal term of 10 years. We understand that the group will be utilising its current Food Processing Centre (FPC) to produce fresh food offerings for the CU outlets.

Targeting 500 CU stores in 5 years, the group will be testing the waters by gradually rolling out around 30-50 new CU stores in the first year, with the first store anticipated to be ready by early CY21. Meanwhile, no fund raising activities are needed at this juncture as the earmarked capex of c.RM30m-RM40m for the first three years will be funded internally via the previous credit facilities secured for the FPC. Notably, the start-up cost for a new CU store is around 10% lower than a MyNews outlet, due to its cheaper fresh food equipment.

Exciting new addition to the portfolio… As the RTE products to be supplied to the new CU outlets would be produced by the group’s Halal licensed FPC, this would ideally help drive up the group’s FPC’s utilisation rate (currently at c.35%) quicker to reach its FY21 break-even target rate at 70%. Besides, being the first of its kind in Malaysia, the group would also be able to tap into the persistently growing popularity of K-Culture through its new CU outlets. CU stores typically sell a greater share of higher margin fresh food content (guesstimated at c.70% of total sales), which could very well serve as good boost to both top and bottom lines after an anticipated gestation period of 2-3 years.

…but comes with downside risks. Though management argues that CU’s distinct product offerings (i.e., own private label Heyroo and exclusive Korean products) and store location positionings would allow them to differentiate themselves from the existing players, we are nonetheless concerned over the possibility that the new CU outlets would overcrowd the already competitive consumer value store space and cross-cannibalise its existing MyNews brand. Furthermore, the execution risk for the expansion of a new brand still prevails, even more so during the current market uncertainty and on top of the group’s existing Maru Café expansion plans.

Maintain UNDERPERFORM with unchanged TP of RM0.48, premised on FY21E 18.0x PER, at -2.0SD of its 3-years historical mean PER. We made no changes to our earnings estimates for now, pending more information from the management.

Overall, we are slightly negative on this venture, given: (i) overall subdued consumer sentiment amid the current Covid-19 outbreak, (ii) possible cross-cannibalisation for its two brands, as well as (iii) prevailing execution risks on top of the group’s existing Maru Café expansion plans which have yet to show promising results. Key risks to our call include: higher–than-expected sales, and faster-than-expected breakeven of FPC.

Source: Kenanga Research - 13 Oct 2020