This article first appeared in The Edge Malaysia Weekly on May 1, 2023 - May 7, 2023

MyNews Holdings Bhd is slowing down its pace of store openings after going on an aggressive expansion spree in the past few years. Instead, the largest convenience store operator is focusing on improving its operational efficiency in a bid to reduce costs and return to profitability.

Having broken a 10-quarter streak of losses with a core net profit of RM700,000 in its fourth financial quarter ended Oct 31, 2022 (4QFY2022), MyNews swung back into a core net loss of RM3.1 million in 1QFY2023 on high operating costs, depreciation charges and finance costs, mainly stemming from the group’s CU store expansion and food processing centre (FPC) which supplies ready-made meals to the group’s outlets. Since opening in June 2019, the FPC had been recording quarterly losses of up to RM4.4 million, narrowing to RM2.5 million in 1QFY2023.

“The increasing costs of business operation and the gestation process in developing the CU brand have delayed our turnaround plan. [In addition], labour cost has increased due to higher minimum wages and increased overtime salaries. High utility cost, inflation and raw material costs are affecting profitability and consumer retail spending,” MyNews founder and group CEO Dang Tai Luk tells The Edge in an interview.

“[As such], we will temporarily scale down our expansion plan compared with previous years and take the opportunity to improve every aspect of our business as we monitor the market and economy closely. The major aim for this year is to turn the company around so that [our] profitability is sustainable and on the upward trend. We will be doing this until we are ready to roll again,” he says, adding that its strategy is to now focus on lowering costs while improving efficiency, sales margins and revenue.

At end-January 2023, MyNews had a network of 614 outlets (466 MyNews, 131 CU and 17 WH Smith) compared with 567 last May. New CU outlets have been driving its store expansions.

However, this may see the convenience store operator’s ambition of having 500 CU outlets within five years of opening its first store in April 2021 taking a backseat as the group continues to retreat from its previous target to open 100 stores per year to 80 last year. For FY2023, the group plans to open a total of just 50 outlets comprising all three brands, subject to market conditions.

“Depending on the locations secured, we will position the most suitable brand in each location. We look forward to increasing the rate of store expansion once it is feasible to do so. We are quite agile. Based on our past, opening a higher number of stores when the conditions permit is not difficult,” Dang explains.

It remains to be seen if Dang’s earlier expectation for the CU outlets to break even within two years from 1QFY2022 may also be pushed back.

MyNews’s scaling down of its growth plans also sees it lowering the utilisation target for its FPC, which has yet to break even.

“MyNews says its FPC will break even this year, with a utilisation rate of 70% to 75%. Currently, the rate hovers at around 60%,” Kenanga Research analyst Tan Jia Hui tells The Edge.

“Last year’s target was to hit 80% to 90% in utilisation but the group said that progress was slow as its FPC faced a shortage of foreign labour. Now, even though both centres are sufficiently staffed with about 150 foreign workers, utilisation still stands at only 60%.

“That the FPC’s utilisation rate stands at [only] 60% shows that demand is just not there. Economies of scale for the group’s growth plans to take off are absent in the near term,” adds Tan, who points out that the lacklustre demand is industry-wide and is affecting other players as well as buyers, who have turned cautious on discretionary spending amid economic challenges.

It spite of the challenges plaguing the convenience store operator, analysts are forecasting that, barring a longer-than-expected gestation period for the CU stores, MyNews will turn profitable in 2HFY2023 in view of bright spots such as the operator’s ability to post record quarterly sales and improvements in gross profit margin. Analysts also observe a reduction in inventory wastage and improvement in performance of the FPC.

Following a steep correction in MyNews’ share price recently, Tan has upgraded her call on the stock to “market perform” from “underperform”, with a target price (TP) of 41 sen. Shares in MyNews had fallen 26.98% year to date to close at 46 sen last Thursday, valuing the group at RM313.79 million. The stock has been trading between 36 sen and 72 sen in the past 52 weeks.

Other analysts who believe MyNews will turn the corner in the second half are CGS-CIMB Research’s analysts Khoo Zhen Ye and Walter Aw, who have an “add” call on the stock, with a reduced TP of 66 sen from 83 sen previously.

“We see a potential turnaround in 2HFY2023 based on higher sales from increased store count and new product launches, better product mix, slower expansion plan and enhancing store efficiency to rein in operating costs, easing of raw material costs, and better wastage control,” Khoo and Aw say in a March 31 report.

RHB Research analyst Soong Wei Siang, who has a “buy” call on the counter with a reduced TP of 66 sen from 73 sen earlier, foresees a sustainable rising trend of convenience store dining in spite of busy lifestyles and higher hygiene awareness among consumers.

Soong believes that MyNews, being an early mover, will be in a position to capitalise on the demand when the culture proliferates and a more refined business model is formulated to meet consumer preferences later.

MyNews’ Dang believes the group’s sales performance will improve from quarter to quarter as the result of its store network expansion, as well as ongoing efforts to increase in-store sales and improvements to boost demand.

He maintains that continuing improvement in front-end sales will elevate the demand for ready-to-eat products and thus increase the production volume of the FPC. He specifies that improvements to the outlets’ product mix by way of a larger contribution of fresh food and beverage products amid a careful increase of store count and working hours to drive sales and better waste management are also expected to improve the group’s performance except for “certain quarters with [adverse] impacts such as the fasting month”.

RHB Research is projecting that MyNews’ revenue, which rose 60% to RM631 million in FY2022 from RM394 million in the previous year, will grow further to RM778 million in FY2023, RM883 million in FY2024 and RM973 million in FY2025. This will give the group a recurring annual net profit of RM5 million, RM18 million and RM30 million in the three years, the research house estimates.

In spite of the increasing trend in total revenue, is profitability really imminent? If achieved in the second half, how sustainable will it be?

Dang cautions that a fluctuating trend in profitability in the near term may be inevitable as the group continues to face increasing business costs wrought by inflation and the gestation process in developing the CU business.

Dang assures that although the challenges may delay the group’s turnaround timeline in the worst-case scenario, they are unlikely to derail its long-term plan of maintaining its position among leading players in the daily grab-and-go segment.

CGS-CIMB Research is forecasting MyNews to turn around in FY2023, recording a net profit of RM3.4 million compared with a net loss of RM43.21 million and RM18.17 million in FY2022 and FY2021 respectively, and go on to post a net profit of RM13.21 million for FY2024 and RM14.03 million for FY2025. 

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