• Upgrade to BUY from Neutral, with unchanged DCF-derived MYR0.59 TP, 44% upside. Results exceeded expectations following the drastic narrowing of 3QFY22 (Oct) losses. Essentially, we believe the worst is over, as we foresee the improvements in all components of the business underpinning a sustainable earnings recovery. Over the longer run, Mynews is well-positioned to capitalise on the proliferating convenience store dining culture with its scalable CU brand, while its depressed valuation presents a valuable entry opportunity.

• Sharp narrowing of losses in 3QFY22 – a positive sign. Following a narrower 3QFY22 core loss of MYR1.5m (-85.8% QoQ, -90.3% YoY), 9MFY22 losses stood at MYR19.5m – above our and Street’s full-year estimates. 9MFY22 revenue came in 52% higher YoY, from stronger sales during the period owing to the return to normalcy, and higher number of outlets (573 stores from 515 in 3QFY21). 9MFY22 GPM expanded to 33.6% (from 31.2% in 9MFY21) due to a more favourable product mix, thanks to CU offerings, and an improvement in inventory wastage control. Meanwhile, the food processing centre (FPC) recorded narrower 3QFY22 losses of MYR1.9m (from MYR3.7m in 3QFY21), dragged by the labour shortage. All in, 9MFY22 core loss narrowed to MYR19.5m (from MYR34.2 in 9MFY21).

• The only way to go is up. While concerns surrounding CU’s longer-than- expected gestation period (c.2.5 years) still linger, we believe that management’s approach in streamlining its expansion plan to better manage start-up costs should yield positive results. In the meantime, the full normalisation in foot traffic and further extension of operating hours for the stores should mean that a turnaround could take place as soon as 4QFY22 – further complemented by the FPC which is expected to break even by the year-end. We gather that the group is expecting an inflow of workers by the year-end to boost the FPC’s utilisation rate further. With the increased gravitation towards convenience store dining culture and fresh food offerings, we believe that Mynews stands to benefit from the return of foot traffic in the Klang Valley as well as CU’s increased geographical footprint nationwide, while CU’s favourable product mix should effectively support GP margins as well.

• Earnings revision. We slash our FY22F forecasted loss to MYR19m (from MYR31m previously), in view of the stronger-than-expected narrowing of losses for the quarter. Our TP remains at MYR0.59 and implies 31x FY23F P/E which is around its 5-year mean and incorporates a 2% premium, given its ESG score of 3.1, which is above the country median.

• Risks to our call include a higher-than-expected increase in the start-up costs for CU, and weaker-than-expected consumer sentiment.

Source: RHB Research - 28 Sep 2022