MYNEWS has put in place plans to strengthen the product and service quality at its CU stores via cooking classes and professional training on customer-service skills for its staff. We believe it has room to catch up vis-à-vis its competitors in terms of product variety and adaptation to local taste buds. We maintain our earnings forecasts and TP of RM0.41, but upgrade our call to MARKET PERFORM from UNDERPERFORM as its risk-reward profile has turned more favourable after the recent correction in its share price.

We came away from a recent engagement with the company still feeling cautious over its operating environment but take comfort that it is very much on the ball. The key takeaways from the engagement are as follows:

i. We understand there is room for improvement for its Korean themed convenient stores CU in terms of consistency in product quality especially fresh food products which typically make up c.60% of total products via: (i) cooking classes for its employees on preparing Korean rice cake (Tteokbokki) and Korean fried chicken (DakGang Jeong), and (ii) strengthening quality control on fresh food items, for instance, preparation of sandwich fillings at its food processing centre (FPC). To broaden the appeal of its products to a wider customer base, it is introducing new SKUs such as CU curry laksa, gimbap and mix-and-match flavour sandwiches and phasing out less popular ones such as berry drinks and the plant-based series.

ii. It is also addressing the service quality of customer-fronting staff (including foreign workers) by providing professional training on customer service skills, especially to the cashiers. It is also equipping its employees with better product knowledge to enhance the customer experience.

iii. Apart from these internal challenges, we believe CU stores have room to catch up vis-à-vis its competitors in terms of: (i) product variety (especially fresh food products), adaptation to local taste buds and strong signature products (such as Family Mart’s Oden and soft-serve ice cream) which are key contributing factors to recurring sales; and (ii) store network and expansion plan, which will lead to better economies of scale.

iv. There is no change to their guidance that its FPC may not turn around anytime soon due to sustained high raw material, labour and utility costs. We understand that its utilisation rate still hovers at about 60% (vs. an estimated break-even point of 70%- 75%) in FY23 as there is more work to be done to boost the productivity of its foreign workers.

We maintain our forecasts that MYNEWS will turn profitable in FY23 (vs. a net loss of RM18.2m in FY22) on reduced inventory wastages and improved performance of the FPC, barring a longer-than-expected gestation period for its CU stores.

We also maintain our TP of RM0.41 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 4).

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 improvement 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.

Having said that, its risk-reward profile has turned more favourable after the steep correction in its share price recently. Upgrade to MARKET PERFORM from UNDERPERFORM.

Risks to our recommendation include: (i) a longer gestation period for its CU stores, (ii) higher inventory wastages at its FPC, and (iii) sales of fresh food and ready-to-eat products fail to gain traction.

Source: Kenanga Research - 27 Apr 2023