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This article first appeared in The Edge Financial Daily on February 11, 2020

Mynews Holdings Bhd
(Feb 10, 94.5 sen)
Maintain add with a lower target price (TP) of RM1.08:
Mynews Holdings Bhd’s new food processing centre (FPC) is currently loss-making given its low utilisation at 40% to 50% and high wastages at more than 20%. While we expect the FPC to remain in the red in the next few quarters, the losses should narrow as Mynews seeks an equilibrium among its product offerings, production volume and wastage.

For the financial year ending Oct 31, 2020 (FY20), it targets to grow its ready-to-eat (RTE) sales via a higher advertisement and promotional (A&P) spending, a refreshed product packaging and better brand credibility and awareness.

Although we believe these strategies will deliver higher earnings in the long term, Mynews will have to incur higher-than-expected operating costs in the near term. This includes boosting the A&P budget — RM3 million for FY20 versus a negligible sum for FY19, hiring more personnel and implementing effective data collection methods for big data. Also, we expect wastages to remain high at 20% in FY20 as Mynews innovates new products.

While Mynews maintains its target of opening 100 new stores — 19.5% higher versus the existing store base of 515 at end-FY19 — it also plans to revamp 100 existing stores — on the frontage and also optimise their layouts — with RM200,000 allocated for each outlet.

Mynews stated its revamped outlets typically record 20% to 40% higher sales in the first two weeks of operations after renovations. Mynews has earmarked a total capital expenditure (capex) of RM80 million for FY20 — RM20 million higher than our previous assumption.

Nevertheless, we believe the worst is likely over for Mynews from the fourth quarter ended Oct 31, 2019 (4QFY19), with a net profit of RM3.3 million — the lowest quarterly earnings since its listing. We expect higher earnings for Mynews in the coming quarters from higher sales from all segments including RTE products, a tighter overall cost control and more new store openings.

Our earnings per share forecasts for FY20 to FY22 are cut 19.4% to 24.9% to account for the FPC’s higher losses, an increase in operating expenditure and a higher capex. Accordingly, our TP is lowered to RM1.08, still based on 24 times 2021 price-earnings in line with regional peers’.

While Mynews’ earnings outlook for the near term is weak, we believe long-term positives such as setting up its large-scale FPC will strengthen Mynews in Malaysia’s convenience store space and differentiate it from its competitors. — CGS-CIMB Research, Feb 7

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