This article first appeared in The Edge Financial Daily on December 18, 2018

MyNews Holdings Bhd
(Dec 17, RM1.43)
Maintain underperform with an unchanged target price (TP) of RM1.25: MyNews Holdings Bhd’s financial year 2018 (FY18) core profit after tax and minority interests (Patmi) of RM26.5 million (+10%) was within expectations at 95% and 93% of our and consensus full-year earnings estimates. There was no dividend declared for the quarter as MyNews typically pays dividend once a year in the second quarter, bringing full-year dividend per share to 1.0 sen (FY17: 1.0 sen).

Year-on-year, FY18 core Patmi increased only 10%, with a net profit margin contraction by 0.5 percentage point (ppt) to 6.8% from 7.3% in FY17 despite a +20% surge in revenue, mainly due to higher operating expenses (+30%). Gross profit margin, however, improved 0.9 ppt to 37.7% from 36.8% in FY17 due to a better merchandise mix, especially from the expansion of its fresh foods offering to more outlets.

The higher operating expenses were in tandem with opening 80 new outlets to 436 stores, as well as higher staff costs, rental expenses, and expenses incurred for a bigger head office at Taman Sains in Kota Damansara and a new Johor Baru distribution centre.  

Take note that the group’s effective tax rate of 19.3%, from 21.7% in FY17, is lower than the Malaysian statutory tax rate because one of its wholly-owned subsidiaries, DKE Technology Sdn Bhd, is a multimedia super corridor-status company, enjoying certain tax incentives.

Quarter-on-quarter, the fourth quarter ended Oct 31, 2018 (4QFY18) core Patmi plunged 17% despite a higher revenue (+12%), mainly due to a higher effective tax rate of 23.7% from 12.7% in 3QFY18; higher operating expenses (+13%) in tandem with opening 32 new outlets; and an unfavourable merchandise mix with a lower gross profit margin by 1.5 ppts to 36.6% from 38.1% in 3QFY18, despite launching the new house brand “Maru Kafe” in the quarter. MyNews plans to open about 70 new outlets in FY19, lower than the additional 90 new outlets in FY18.  

Nonetheless, we expect earnings margin to be limited by higher staff and rental costs during this expansionary period; and start-up costs for an in-house food-processing facility, expected to be fully completed by January 2019 — supported by its joint-venture companies, MyNews Kineya Sdn Bhd and MyNews Ryoyupan Sdn Bhd. We maintained our “underperform” call with an unchanged TP of RM1.25 based on 27 times FY19 estimated earnings per share, in line with regional peers’ average price-earnings ratio, given the stiff competition in the saturated modern convenience store market. Key risks include higher-than-expected sales, and lower-than-expected operating expenses. — Kenanga Research, Dec 17