• Keep NEUTRAL, new MYR0.54 TP from MYR0.50, 1% downside. Mynews’ 9MFY23 (Oct) core earnings are within expectations, with its convenience store chain CU booking narrower losses due to more favourable seasonal factors and higher traction. While we believe CU could see a turnaround moving into FY24F, the visibility on the pace of this recovery remains uncertain. We stick to our cautious outlook on the stock for now, in view of Mynews’ less attractive risk-to-reward ratio.

• Within expectations. Mynews’ 9MFY23 core loss of MYR10.6m (9MFY22: MYR16.5m) is within our and Street estimates. No dividend was declared, as expected. Note that we adjusted for PPE written off and the loss on disposal of PPE amounting to MYR1.1m, to arrive at the core loss figure.

• Results review. YoY, 9MFY23 revenue surged 20.7% YoY to MYR544.1m, mainly driven by contributions from new outlets (adding 20 stores, to a total of 593) on the back of Malaysia’s economic reopening. GPM for 9MFY23 widened by 0.9ppts to 34.5% – attributed to a better product mix, as a result of higher contributions from the CU segment. QoQ, 3QFY23 sales rose 6.7% as 2QFY23 sales were a low base, being affected by Ramadan. Correspondingly, the 3QFY23 core net loss narrowed to MYR1.5m from MYR5.9m in 2QFY23. Meanwhile, the food processing centre’s loss narrowed to MYR2.3m in 3QFY23 due to an increase in its utilisation rate.

• Outlook. The competitive nature of the industry and subdued consumer spending, arising from heightened inflationary pressures, could continue to impact the group’s performance ahead. Hence, we expect it to remain in the red for the near term. However, given the gradual establishment of CU's brand equity and improvement in traction, we do not expect these losses to worsen. Besides, we gather that management plans to accelerate its outlet expansion – it is targeting to open over 100 new stores in FY24 – despite the prevailing environment of high operating costs. On a positive note, Mynews has continued to record improved consistency and stability in its earnings, following a successful business rationalisation exercise. Also, the recovery of air travel is expected to improve the performance of the WH Smith stores it manages in international airports.

• Forecasts and ratings. We make no changes to our FY23-25F earnings as the results are in line with estimates. However, we lift our DCF-derived TP slightly to MYR0.54 after updating our CoE assumption to 10.8% (from 11.7%) with a renewed beta input post housekeeping. Our TP also includes a 2% ESG premium, as its ESG score of 3.1 out of 4 is a notch above the country median. Our TP implies 28.3x FY24F P/E, which is at +1SD from the mean.

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

Source: RHB Securities Research - 27 Sept 2023