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This article first appeared in The Edge Financial Daily on June 22, 2018

Mynews Holdings Bhd
(June 21, RM1.58)
Maintain hold with a target price (TP) of RM1.50:
Mynews Holdings Bhd posted a revenue of RM94.2 million in the second quarter ended April 30, 2018 (2QFY18), up 18.8% year-on-year (y-o-y); core net profit rose 10.1% y-o-y to RM6.8 million. First-half (1HFY18) core net profit was RM13.2 million, up 4.8% y-o-y and made up 45% of our and Bloomberg consensus full-year forecasts.

 

The results are in line as we expect a stronger 2H  mainly on better consumer spending and domestic market sentiment, boosting demand for its products. Its 2QFY18 y-o-y sales growth was mainly boosted by a higher store count and higher other income — mainly advertising and promotion income, distribution centre charges and rebates.

The 2QFY18 gross profit margin advanced 0.7 percentage point (ppt) y-o-y to 38.7% on an improved product mix — higher sales of fresh food and ready-to-eat (RTE) products. Despite a 23.3% y-o-y increase in operating costs on higher utilities, rental and staff costs, Mynews eked out a higher net profit growth of 10.1% y-o-y. Revenue and core net profit grew 4.5% and 7.7% y-o-y respectively on a growth in store count to 385 stores (+19 net new stores) and an improved gross profit margin (+1.1ppts y-o-y) to 38.7%, which more than offset the higher operating costs — rental and staff costs.

We believe Mynews’ earnings growth will continue to be driven by new store openings (+90 stores per annum) and increased profitability from the sale of higher-margin products. The group’s upcoming food processing facility is slated to be completed by early 2019, following which its economies of scale will improve.

Recall that the group had earlier tied up with Japanese partners to develop its fresh food product segment. We retain our earnings forecasts, “hold” call and end-2019 forecast TP of RM1.50, still based on a blended price-earnings ratio and price-earnings growth valuation.

Even though we are positive on the group’s long-term earnings accretion from higher sales of RTE and bakery products (which typically carry higher margins), we believe its current valuation has already priced in its earnings growth prospects.

The key upside risks to our call include greater-than-expected sales of higher-margin products and faster store expansion, while downside risks include intensifying competition in the convenience store space. — CGSCIMB Research, June 20

 

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