This article first appeared in The Edge Financial Daily on March 28, 2018

KUALA LUMPUR: Shares in myNEWS Holdings Bhd, formerly known as Bison Consolidated Bhd, fell as much as 11 sen or 6.88% to RM1.49 yesterday morning, after the company reported a spike in operating expenses that resulted in a marginal 0.33% decline in net profit to RM6.34 million in the first quarter ended Jan 31, 2018 (1QFY18), from RM6.36 million a year ago.

At the closing bell, shares in myNEWS regained some lost ground to close at RM1.51, but still down nine sen or 5.62%. The stock is up about 64% from 92.2 sen in the past 12 months.

According to its quarterly earnings announcement on Monday, the company’s operating expenses rose 32.4% year-on-year in 1QFY18, in tandem with an increase in outlets to 366 stores as at Jan 31, 2018, from 307 as at Jan 31, 2017.

Quarterly revenue, however, rose 18.2% year-on-year to RM90.12 million from RM76.23 million on new store openings, better product mix, and higher other operational income.

Two analysts who say higher operating expenses may persist for myNEWS have downgraded the stock to “sell”.

“Apart from lofty valuations, myNEWS faces intensifying competition, with Family Mart’s increasingly imposing store presence and products,” said AmInvestment Bank analyst Philip Wong in a research note yesterday, adding that its operating margins deteriorated as it incurred higher costs related to beefing up its ready-to-eat and fresh food segments.

Nevertheless, in the longer run, Wong believes the impending completion of myNEWS’ food processing facility by end-calendar year 2018 (CY18) should help it command better margins. Hence, despite a downgrade to “sell”, he gave the stock a higher fair value of RM1.31.

Meanwhile, Kenanga Research analyst Wan Mustaqim Wan Ab Aziz, who downgraded the stock to “underperform” with a lower target price (TP) of RM1.25, noted that myNEWS plans to open around 90 new outlets in FY18, more than the 70 additions it made in FY17.

“We expect the earnings momentum to be subdued due to higher staff and rental costs during this expansion period as well as start-up costs from the commission of in-house food-processing facility, which is expected to be completed by end-CY18,” he said.

The research house also cut its estimates for FY18 and FY19 net profit by 23% and 21%, respectively, as it has factored in the higher-than-expected operating expenses.

CIMB Investment Bank Bhd research analyst Kristine Wong, however, has maintained her “hold” call for myNEWS, with a TP of RM1.50. She said despite her positive view on the stock, its current valuation already fairly reflects its growth prospects.

But RHB Research Institute Sdn Bhd analyst Soong Wei Siang maintained a “buy” call on the stock with a higher TP of RM2.03, as he continues to like management’s entrepreneurial drive, solid track record and attractive value proposition.