2QFY22 net loss came below our and consensus’s estimates due to higher opex, cushioned by higher GP on better product mix and cost control. No dividend as expected. We believe new stores launches will improve its topline while remaining cautious on margins due to operational inefficiency and higher depreciation costs. Revised FY22E earnings downwards to LATAMI of RM33.3m due to higher-than-expected opex on the aggressive expansion of outlets. Downgrade to UNDERPERFORM with a lower TP of RM0.50 (from RM0.85) based on FY23E EPS of 2.3 sen at 22x PER.

Below expectation. 1HFY22 core net loss of RM18.1m came in below our/consensus earnings forecasts of RM19.9m/-RM6.7m, respectively, as an aggressive expansion of outlets continues to weaken its bottom line. No dividend, as expected.

YoY, 1HFY22 revenue improved by 38.5%, given an increase in new outlets and store traffic on international borders reopening and lifting of travel restrictions. GP margin rose 0.7ppt to 32.5%, attributed to a better product mix favoring higher margin products. However, the group suffered a consequent net loss of RM18.1m (vs. 1HFY21 net loss of RM19.3m) due to higher depreciation cost on the outlets opening.

QoQ, despite flattish revenue growth of 1.2% in 2QFY22, GP margin improved by 10.7% to 33.9%, thanks to better product mix from CU outlets and better inventory wastages control. However, the group continued to suffer a net loss of RM10.2m on a lower EBIT margin of - 6.2% (vs. 1QFY22 -5.2%) due to: (i) higher administrative costs on recruiting new workforce, (ii) higher A&P expenses for branding CU outlets, and (iii) increase in depreciation of PPE.

Outlook. On the endemic situation, the group continues to improve its topline by: (i) expanding its CU business by opening new outlets and longer operating hours, and (ii) increasing its utilization rate of the FPC (guestimate of the current utilization rate of 50-55%). We understand that CU stores have a higher ticket size than the conventional MyNews store; thus, the group focuses new launches in the CU business. However, we are cautious on the margins due to additional costs incurred in opening and promoting CU business, such as (i) higher administrative costs on recruiting and salary adjustment, and (ii) higher depreciation and marketing expenses while the business is undergoing the gestation period.

Post results, we slashed our FY22E earnings to LATAMI of RM33.3m and FY23E earnings by 11% to RM15.7m, both on account of the inability to finance its high opex due to outlet expansion.

Downgrade to UNDERPERFORM with a lower TP of RM0.50 (from RM0.85) as we roll forward valuation to revised FY23E earnings with an ascribed PER of 22x, which is at about 30% discount to the industry’s historical average 1-year forward PER of 30x to reflect its longer and more winding growth path.

Source: Kenanga Research - 28 Jun 2022