MYNEWS has scaled down its expansion plan as it intends to “focus more on product quality and expanding its SKUs”. We believe, it could have also considered the intensifying competition in the industry which is getting crowded with more players vying for customers. Hence, we cut FY23-24F net profit by 26% and 17%, respectively, reduce our TP by 18% to RM0.41 (from RM0.50) and maintain our UNDERPERFORM call.

We came away from MYNEWS’s analyst briefing last Friday feeling cautious over its prospects as explained by the key takeaways as follows:

1. MYNEWS has scaled down its expansion plan for FY23 with only a net addition of 50 stores vs. 80 stores as guided previously, as it intends to “focus more on product quality and expanding its SKUs”. We believe, MYNEWS could have also taken into consideration the frantic pace at which its competitors have added new stores post the pandemic. This has reduced the viability of new stores in certain locations flooded by too many players. Ironically, MYNEWS itself opened eight new Mynews and six new CU stores during 1QFY23.

2. MYNEWS expects a slower 2QFY23 (Feb-Apr 2023) vs. 1QFY23 (Nov 2022 – Jan 2022) on the back of the Muslim fasting month in Mar-Apr 2023 as it caters largely to daytime commuter and office crowds. We believe apart from the seasonality, MYNEWS is also feeling the pinch from more convenience store operators fighting for the same consumer’s dollar as well as consumers cutting back spending on non-essential snacks and drinks as inflation bites deeper.

3. Its food processing centre (FPC) may not turn around anytime soon due to sustained high raw material, labour and utility costs. Meanwhile, we now project its utilisation to only rise from an estimated 60% at present to c.75% over the near term (vs. 80%-90% as previously assumed) as we have yet to see any significant jump in its productivity after the recent arrival of foreign workers.

4. It is confident that its food inventory wastage will continue to improve and will be capped at 15%-20% which it has achieved, in line with the industry level since 4QFY22. This will be achieved via better inventory cost on reducing stockholding days and improving the efficiency of logistic planning.

5. MYNEWS has launched new ready-to-eat (RTE) foods such as sandwiches, gimbap, CU curry laksa series and others with new flavours and different combination of product mix to attract more customers. We understand that new products promotion in store will be done in the subsequent quarters, resulting in higher costs during the trial period. We also understand that MYNEWS is expecting to adjust its ASPs for fresh food products to cushion the higher opex.

Forecasts. We cut our FY23-24F net profit by 26% and 17%, respectively, to reflect the scaled-back expansion plan, a slower FY23F same-store sales growth of 6% (vs. 12% assumed previously, a higher opex, particularly, labour and electricity costs and lower FPC utilisation.

We lower our TP by 18% to RM0.41 (from RM0.50) based on 19x FY24F PER, at a 20% discount to the forward PER of 24x of a 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 (see Page 5). Maintain UNDERPERFORM.

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) returning to the growth path with the turnaround of its FPC and planned net addition of 50 stores in FY23, 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.

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

Source: Kenanga Research - 3 Apr 2023