Rapid CU expansion a key earnings catalyst
- We upgrade the stock to Add from Hold, as we think its valuations should rerate with the acceleration of CU store openings alongside footfall recovery.
- As movement restrictions ease, we expect average revenue per store and sales mix to meaningfully recover beginning 4QFY21F.
- We think the group’s operating leverage will likely kick in as it increases the pace of CU store openings to take advantage of the strong footfall recovery.
Better footfall ahead as toughest movement restrictions ease
To recap, Mynews Holdings (MNHB) reported its widest quarterly loss of RM14.2m in 3QFY10/21 as Malaysia was hit by surging Covid-19 cases and tough movement restrictions. Nonetheless, we believe the worst is likely over as movement restrictions ease. We expect that with the longer operating hours, footfall should improve significantly for MNHB’s store base beginning 4QFY21F. Normalising buying patterns also could aid in gross margin expansion as its product mix shifts towards higher-margin items such as fresh food vs. lower-margin dried goods and cigarettes.
Continuing its expansion drive with CU taking the lead
Moving forward, we expect MNHB to resume its store expansion drive as the lifting of movement restrictions nationwide enables construction and refurbishment activities to resume. MNHB opened only four CU-branded stores in 9MFY21. We gather that MNHB is looking to accelerate the opening of CU-branded outlets and is hoping to cross the 50- store mark by Dec 2021F. It targets to open more than 15 CU outlets in Oct 2021F alone across identified locations in the Klang Valley. The group shared that metrics for the first four stores opened up to 3QFY21 exceeded expectations, and our on-the-ground checks found large crowds for some of the newly-opened outlets, suggesting strong reception and potentially shorter gestation periods for the early outlets.
Operating leverage to kick in with ramp-up of CU store openings
We believe MNHB’s earnings recovery hinges on the pace of CU store openings and take-up rates for its higher-margin ready-to-eat (RTE) food items. The acceleration of CU outlet openings should also aid in narrowing the losses at its food processing centre (FPC) as CU outlets carry a higher proportion of RTE food items than myNEWS outlets. MNHB believes it should hit breakeven for its FPC by end-FY22F at a utilisation rate of 70% (currently c.30%), assuming it is able have a total of c.150 CU outlets by end-FY22.
Upgrade to Add; CU store outperformance a key re-rating catalyst
We upgrade our call from Hold to Add, with a higher TP, as we raise our target P/E multiple to 29x (from 24x previously), which is in line with its pre-pandemic average P/E since its IPO in 2016 but at a c.13% discount to regional convenience store peers. We think the discount is fair considering its relatively smaller size and potential execution risks. In the near term, CU store outperformance and a faster-than-expected breakeven trajectory for its FPC are key re-rating catalysts for the stock. Key downside risk : i)
weaker-than-expected reception for its CU outlets, ii) slower-than-expected recovery in sales per store, and iii) a resurgence in Covid-19 cases derailing a recovery in footfall.