MYNEWS will focus more on rolling out its neighbourhood convenient stores known as myNEWS SuperValue in FY23 and shifting its priority back to CU stores in FY24. It is putting in place several measures to improve the operation of its CU stores. With the view that it takes time for these efforts to pay off, we now forecast a loss in FY23 (vs. a profit previously). We also lower our TP by 6% to RM0.31 (from RM0.33) and maintain our UNDERPERFORM call.

We came away from its post-results briefing still feeling cautious over its operating environment but take comfort that efforts are underway to address various issues. The key takeaways are as follows:

1. MYNEWS outlets inclusive of 19 WHSmith outlets currently stand at 615 comprising 463 myNEWS and 133 CU outlets. For 2QFY23, there was a net addition of 2 outlets (opened 5 namely 2 myNEWS, 2 WHSMITH and 1 CU while 3 outlets were shut down namely 2 myNEWS and 1 CU store). 72% of myNEWS stores and 50% of CU stores are located in the Klang Valley. Due to logistical challenges, there are no myNEWS and CU stores in the northern east states due to the short shelf life of its food SKUs. Moving forward to the medium term, emphasis will be expansion in the west coast of Peninsular Malaysia.
    
2. The planned net addition of 50 stores still holds for FY23 of which 17 will be neighbourhood convenient stores under the myNEWS SuperValue brand and the remainder will be myNEWS and CU stores (with more myNEWS stores than CU stores). For FY24, the company is targeting a net addition of 70 to 100 stores with more emphasis on CU stores.
    
3. The company reiterated there is room for improvement for CU stores. Since they started two years ago, there have been operational challenges such as high wastages (during public holidays), compounded by short shelf life and its packaged SKUs from Korea that do not immediately suit the local taste buds. Ineffective brand positioning and the lack of knowledge of Korean products among its staff and high staff turnover worsened the situation. The company is addressing the issues by: (i) introducing a more balanced packaged SKU portfolio comprising both Korean and local products, (ii) offering better training to its staff, and (iii) stepping up staff retention efforts. Overall, the group’s ongoing efforts in place are wastage and stock loss control, innovation and streamline of SKUs, reducing inventory days and conversion, improving logistics and opening of more SuperValue stores in residential areas. Not all outlets will operate 24 hours that are only for those operating in high-catchment residential areas.

The FPC utilisation rate is still at 60% with plans to bring it to a more acceptable level of 75% by boosting sales from current available stores and not increasing the number of stores. In the meantime, costs are still high due to workers inflow in 4QFY22 plus elevated utilities costs as the facility requires certain temperature level to maintain food quality as emphasised by its Japanese partners.

Forecasts. We revised down our FY23F earnings to a net loss of RM8m (vs. net earnings of RM3m previously) as operational efficiency is still a long way off or at least not for FY23.

Consequently, we cut our TP to RM0.31 based on our FY23F BV (from RM0.33 previously). On tepid earnings projections over our forecast period, we believe the forecast BV is the furthest we will go as far as its valuation is concerned. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We still 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, (iii) its differentiation from competitors through Korean products and iv) growing traction for its Korean products. However, we are concerned over its i) volatile quarterly earnings trend, ii) longer gestation period for its CU stores and (iii) overall operational efficiency still a long way off. Maintain UNDERPERFORM.

Risks to our call include: (i) its CU stores to turn around sooner than expected, (ii) further reduction of inventory wastages at its FPC, and (iii) stronger-than-expected sales of fresh food and ready-to-eat products.

Source: Kenanga Research - 21 Jun 2023