This article first appeared in The Edge Financial Daily on April 1, 2019

KUALA LUMPUR: Not keeping up with the ever-evolving times, and failing to understand what consumers need, was how Kodak went out of business.

Mynews Holdings Bhd, the second largest convenience store chain operator after 7-Eleven Malaysia Holdings Bhd, seems to be one that is responsive to consumers’ preferences and demands.

In fact, its chief executive officer (CEO) Dang Tai Luk has been fine-tuning his business model, turning MyNews into a convenience store chain in Malaysia from being just a single news stand 22 years ago.

“We managed to innovate and change our concept as we moved forward. And we were saved,” said Dang.

He noted that Mynews had to always be on its toes to keep up with the fast-changing market, adding that the company had been exploring other convenience stores overseas.

“This is a very interesting market segment. It’s very exciting as it is continuously changing.”

“Convenience stores are where you can walk into a 1,000-sq ft place, and you can find 2,000 different items and also having it close to where you are staying,” said Dang.

Unfazed by competition, Dang said: “We are not stopping. We are undertaking powerful projects and initiatives to put ourselves ahead of the pack.”

And one of its plans is to embark on the ready-to-eat (RTE) food business, transferring the know-how and the way of doing it from the Japanese.

“There will be a cultural change, whereby people will want to be able to buy their food and pick it up fast,” he told The Edge Financial Daily.

“I believe that there will come a time when we will be one of the major game changers in terms of expectations from consumers for providing them the quality and hygiene they are expecting,” said Dang.

Its food processing centre (FPC) is scheduled for completion by the middle of this year, which will distribute genuine Japanese-quality RTE and bakery products, said Dang, adding that the FPC is expected to supply to 150 stores this year and 300 stores next year.

Three years ago, at the time of its listing, the RTE business only contributed 5% of the group’s total revenue, and it is 12% now, said Dang.

With the FPC to be on board this year, he expects 17% of total revenue to be derived from the RTE business this year.

Now, in some of its stores, Mynews is offering soft-serve ice cream and fresh brewed coffee at its Maru Kafe, which officially opened in October 2018. This is pretty similar to FamilyMart’s famous green tea ice cream and oden counter — which is no stranger to Malaysians.

Mynews is seeing a 20% annual growth in customer count, while the average spending is above RM6 per customer and increasing with stores that have the Maru Kafe offering, said Dang.

While the food and beverage segment makes up some 40% of its total offerings now, he sees an increase to 70%.

Coupled with the improved product mix and offerings, Mynews has transitioned into a store with seating areas and free Wi-Fi, enabling better customer experience.

“It (seating areas) also gels well for our forward plan of offering more food and beverages,” said Dang.

Record momentum to continue into FY19

With 85 new stores last year, Dang said Mynews is targeting to set up at least another 85 new stores this year. To date, Mynews has nearly 470 stores.

“We are confident that we will still be able to open that same number of stores as we did last year and if we can do more, that will be a bonus for us,” said Dang.

In line with this, Dang is optimistic about both Mynews’ top-line and bottom-line growth for the financial year ending Oct 31, 2019 (FY19).

He expects last year’s bottom-line growth pace to continue into FY19 on the back of store expansion and its product mix as the company launches new products and services.

In other words, Mynews is eyeing another good year in FY19.

Its net profit jumped 30% to RM8.24 million for the first quarter ended Jan 31, 2019, from RM6.34 million last year, thanks to better sales and contributions from new outlets.

Quarterly revenue grew 37% to RM123.5 million from RM90.12 million a year earlier.

For the full FY18, net profit rose 10.34% to a record high of RM26.5 million, from RM24.02 million last year. Annual revenue expanded 19.5% to an all-time high of RM391.53 million from RM327.6 million previously.

With the aggressive expansion of its outlet network, increases in revenue and profit are pretty much expected.

On same-store sales, Mynews is hoping to see a single-digit growth this year.

Dang believes there is still room for growth as convenience stores’ concentration and saturation are still low here partly because the modern outlets are replacing the traditional sundry shops.

“I can tell you that Malaysians have not enjoyed ‘convenience’ because the convenience players here have yet to offer Malaysians as what is being offered by other regional peers [in Japan, Thailand and Taiwan],” said Dang.

“We first began to focus on expanding into the malls. But now, the strategy is to go anywhere where there’s business. And now there are a lot of mixed developments and those are the captive market,” said Dang, noting that Mynews is very focused on the Klang Valley, of which 80% of its stores are set up.

For 2019, the company has also set aside RM120 million for capital expenditure (capex), which will be funded via internal funds and bank borrowings. The bulk of it will be spent on plant construction and machinery, said Dang.

Part of the capex will also be spent on new outlet expansion, equipment as well as information technology infrastructure, said Dang.

Sound fundamentals but expensive

Despite the stellar performance, Mynews’ share price has not been in line. The counter closed at RM1.37 last Friday, valuing it at RM934.6 million.

From the record high of RM1.74 on March 13, 2018, the stock has fallen some 21% over the past 12 months.

While most analysts like the counter due to its strong fundamentals, Mynews is expensive valuation-wise — with a price-to-earnings ratio of 33 times.

According to Bloomberg data, there are eight research houses covering the stock, with five “buy” calls, two “hold” ratings and one “sell”. Target prices for the counter range between RM1.25 and RM1.75.

AmInvestment Bank analyst Nafisah Azmi forecast that Mynews will see net profit of RM34.9 million and RM42.2 million for FY19 and FY20 respectively, on revenue of RM431.6 million and RM482.3 million.

“We like Mynews for its franchise opportunities arising from the myNews.com brand name, and growth potential of its FPC offering RTE and bakery products,” said Nafisah in a report dated March 25.

“We are excited about the completion of the company’s FPC. However, we believe the initial gestation period would take about a year,” she said, adding that Mynews’ gross profit margin would improve, underpinned by a higher-margin contribution from the fresh food segment in the long run.

Meanwhile, CIMB Research analyst Walter Aw projected that Mynews see net profit of RM32.24 million and RM41.79 million for FY19 and FY20 respectively, on revenue of RM509.4 million and RM629.2 million.

According to a research note dated March 25, Aw had raised her FY19 to FY21 earnings per share estimates by 1.4% to 5.8%, taking into account the improved sales contributions, especially from “Heets” and RTE food products, higher economies of scale and adjustments to the adoption of Malaysian Financial Reporting Standard 16.

Since mid-November 2018, Mynews has an exclusive nationwide contract for Heets — the tobacco product used in heat-not-burn smoking devices manufactured by Philip Morris International, said Aw.

With the recent retracement in share price and improved earnings prospects, Aw had also upgraded Mynews to an “add” from “hold”.