• Downgrade to NEUTRAL from Buy, with new DCF-derived MYR0.70 TP from MYR1.22, implying 5% downside. Results missed expectations, with the group remaining in the red for the eighth quarter in a row – largely attributable to slow recovery in Mynews stores and start-up expenses for the CU venture. While we like Mynews for its positioning as a cyclical proxy and its venture into the promising CU brand, we turn more cautious of its turnaround, as its longer-term brand-building approach for CU may entail a longer-than-expected gestation period.

• Results missed expectations. Mynews recorded a 1QFY22 core loss of MYR7.9m, falling short of our and Street’s estimates. 1QFY22 revenue came in 34% higher QoQ and 31.4% YoY, underpinned by the relaxed movement restrictions – which led to higher foot traffic at the stores – and the increase in the number of outlets to 538 (1QFY21: 524 outlets, 4QFY21: 518). Nevertheless, the incremental sales did not proportionately offset the increased opex (+20% QoQ, +37% YoY), resulting from the rapid expansion of CU outlets, as new stores take time to build up traffic. Meanwhile, the food processing centre (FPC) recorded narrower 1QFY22 losses of MYR2m (from MYR3.47m in 4QFY21 and MYR3.36m in 1QFY21), in line with the higher sales registered.

• CU expansion, a double-edged sword. We were overly optimistic on the prospects of a quick CU success, considering the established brand name and quality fresh food offering – we also observed encouraging foot traffic during our sporadic ground checks. Management is seemingly taking a longer-term approach, judging from the sizeable investment on personnel and marketing to strengthen the brand, which suggests a prolonged gestation period and a compromise on near-term earnings. On the other hand, losses are narrowing – albeit on a gradual basis – and the endemic stage of COVID-19, with the reopening of international borders and unrestricted operating hours, should further aid and sustain the group’s overall recovery, as its positioning as a cyclical proxy remains intact.

• NEUTRAL. We slash our FY22-24 earnings forecast by 39-65% as we turn more conservative in our sales growth assumptions. Updating our risk-free rate assumption to reflect the rising bond yields, our TP drops to MYR0.70, implying a 27x FY23F P/E (in line with its 5-year mean). Our ESG score of 3.1 for Mynews warrants a 2% premium ascribed to its intrinsic value.

• Risks. The re-imposition of a lockdown in the face of a stubbornly-high number of COVID-10 cases, and major delays in the vaccination programme.

Source: RHB Research - 25 Mar 2022