MYNEWS guided for its top-line and earnings momentum to sustain into 4QFY22, driven by the return of shoppers, commuters and office crowd. It appeared even more confident that its food processing centre (FPC) will turn around by 1QFY23, as utilisation at the loss-making unit rises to 80-90%, way surpassing the breakeven level of 70%. We raise our FY23F net profit by 35%. Correspondingly, we upgrade our TP by 35% to RM0.70 (from RM0.52). Maintain OUTPERFORM.

We came away from a recent engagement with the company feeling that there are significant upsides to our FY23F top-line and margin forecasts. The key takeaways from the engagement are as follows:

1. MYNEWS guided for its top-line and earnings momentum to sustain into 4QFY22 (Aug-Oct 2022), driven by the return of shoppers, commuters and office crowd as economic activities gradually normalise to pre-pandemic levels. Recall, it reported a 21% QoQ jump in top-line in 3QFY22 (May-Jul 2022) that helped to significantly narrow its net loss to RM1.5m from RM10.2m in the preceding quarter.

2. It appeared even more confident that its FPC will turn around by 1QFY23, as utilisation at the loss-making unit rises further to 80-90% (from 60-65% 1-2 months ago), which is way above the breakeven level of 70%. The much improved utilisation has been attributable to the arrival of foreign workers in recent months. The increased production has been very well absorbed given the strong demand for fresh food items such as bento, onigiri, and other bakery products at its stores.

3. We understand that there has been significant improvement to MYNEWS’s fresh food wastage control at about 15%. This is against about 40% at its worst and the industry average of about 20%. This is achieved on the back of better inventory control based on sales projection in accordance to historical data of each store. Better wastage control will translate to margin improvements.

4. MYNEWS guided for store counts of 461 for MYNEWS and WHSmith, and 126 for CU as at end-FY22 (after factoring in the closure of four stores by FY22). Looking forward, against a backdrop of a full economy reopening and taking the cue from our conversation with the company, we foresee a more aggressive store expansion plan by MYNEWS.

We raise our FY23F earnings by 35% to reflect:

1. a more aggressive same-store sales growth assumption of 13% (from a flattish assumption previously) driven by: (i) improved traffic on the full-year impact of the reopening of the economy, and (ii) an increased basket size with the introduction of new SKUs especially hot fresh food and bakery items;

2. higher net store addition of 50 (vs. 30 we assumed previously); and

3. improved cost efficiency, including stemming from better wastage control as mentioned.

Correspondingly, we upgrade our TP by 35% to RM0.70 (from RM0.52) based on an unchanged 22x FY23F PER, in line with the sector’s average forward multiple. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) the return of movement restrictions, hurting traffic to the stores, (ii) the playing field gets more crowded with new entrants or aggressive expansion by existing competitors, (iii) long gestation periods for new stores, and (iv) reduced overall sales from the generational tobacco ban.

Source: Kenanga Research - 31 Oct 2022