• Downgrade to NEUTRAL from Buy, new MYR0.50 TP from MYR0.66, 2% upside. 2QFY23 (Oct) results missed expectations – dragged by loss-making CU operations and weaker seasonality due to the fasting month. We now turn downbeat on Mynews as our anticipation of recovery signs has not materialised. There is also a lack of convincing action plans to turn things around. That said, we believe losses are unlikely to widen further, considering the plan to scale down outlet expansions, and revisit store productivity and efficiency.

• Results missed expectations. 1HFY23 core losses of MYR9.1m (1HFY22: -MYR16m) missed our and Street’s estimates. The negative deviation was mainly due to a bigger-than-expected drag from CU operations.

• Results review. YoY, 1HFY23 revenue surged 27.7% to MYR358.3m, mainly driven by contributions from new outlets (+39 to total 595 stores) on the back of Malaysia’s economic reopening. 1HFY23 GPMs rose 1.6ppts to 34.1% – attributed to a better product mix as a result of higher contributions from the CU brand. QoQ, 2QFY23 sales declined by 5.4%, largely affected by the Ramadan month and shorter operating month in February. Correspondingly, 2QFY23 net losses widened to MYR5.9m from MYR3.1m.

• Outlook. Sales should normalise going forward, but we foresee the challenges remaining in view of the rising cost environment. This is compounded by softer consumer spending due to elevated inflationary pressures. Meanwhile, management will be scaling down its outlet expansion pace (FY23 target: 50 stores) to better focus on enhancing store productivity and efficiency. This could lead to a reduction in losses from CU operations, but we believe a more effective model will take time to be formulated. Hence, losses should remain in the near term. On the other hand, Mynews has displayed better consistency and stability in earnings delivery following a successful business rationalisation. The progressive recovery of air travel should also improve WH Smith stores’ performances, as they located at the country’s international airports.

• Forecasts and ratings. We trim our FY23F core earnings to -MYR12.9m – from MYR5.5m in positive profit – while cutting FY24F-25F bottomline by 28.4% and 20.8% after factoring in higher operating costs and a more conservative CU turnaround assumptions. Consequently, our DCF-derived TP is lowered to MYR0.50, implying 25.1x FY24F P/E – in line with its 5- year mean. We ascribe a 2% ESG premium on our TP, which based on unchanged ESG score of 3.1.

• Key risks. The downside risks to our call are higher-than-expected increase in start-up costs for CU and weaker-than-expected consumer sentiment. The opposite represents the upside risks.

Source: RHB Securities Research - 20 Jun 2023