MYNEWS’s 1QFY23 results disappointed as it unexpectedly slipped back into the red, unable to sufficiently grow its top line to absorb higher cost. This also implies a longer gestation period for its CU stores. Hence, we cut our FY23-24F earnings by 62% and 38%, respectively, reduce our TP by 34% to RM0.50 (from RM0.76) and downgrade our call to UNDERPERFORM from OUTPERFORM.

Slipped back into the red. It disappointed with a 1QFY23 net loss of RM3.2m vs. our full-year net profit forecast of RM23.8m and the full year consensus net profit estimate of RM14.4m. The variance against our forecast came largely from its inability to grow top line strong enough to absorb higher cost, particularly staff cost.

YoY, 1QFY23 revenue rose by 32% thanks to an increase of new outlets launches with longer business hours as well as higher footfall on the reopening of the economy. This, coupled with a better product mix (with high-margin CU fresh food) and improved inventory wastage control, helped to narrow its core net loss in 1QFY23 by 59%.

QoQ, MYNEWS slipped into net loss of RM3.2m (vs. net profit of RM1.4m in the preceding quarter) as a tepid 2% increase in sales was insufficient to absorb higher overheads, which we believe was mainly incurred on the intake of foreign workers for its food processing centre (FPC) since Sep 2022. We also understand that its CU stores were loss-making.

Outlook. MYNEWS’s top line will continue to expand driven by: (i) new CU outlets and longer operating hours, and (ii) a further rise in utilisation at its FPC to 80%-90% based on our estimate from 60% currently, backed by rising fresh food sales and solved labour issue. A stronger top line, coupled with a better product mix should help to absorb start-up cost (including promotion cost) for new CU stores.

Forecasts. We cut our FY23-24F net profit by 62% and 38%, respectively, to reflect a higher opex, particularly, labour and electricity costs, and a longer gestation period for its CU stores.

We lower our TP by 34% to RM0.50 (from RM0.76) as we roll forward our valuation base year to FY24F (from FY23F) and on reduced earnings forecast. We value MYNEWS at 19x forward PER, at a 20% discount to the forward PER of its listed competitor to reflect MYNEWS’s quarterly earnings volatility. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

We like MYNEWS for: (i) the still under-penetrated convenience store market in Malaysia with approximately 111 convenience stores per million population currently based on our estimates, vs. Thailand, Japan and Australia at 291, 445 and 268, respectively, (ii) its previously disrupted earnings growth trajectory (due to the pandemic) has returned to the growth path with the turnaround of its FPC and net addition of 50 stores in FY23F, and (iii) its differentiation from competitors through Korean products. However, we are concerned over the volatility in its quarterly earnings and a seemingly longer gestation period for its CU stores. Hence, we downgrade MYNEWS to UNDERPERFORM from OUTPERFORM.

Recommendation: (i) a shorter gestation period for CU stores, (ii) lower inventory wastage at its FPC, (iii) fresh food and ready-to-eat products gaining better-than-expected traction

Source: Kenanga Research - 31 Mar 2023