Earnings outlook remains subdued
? We reiterate Reduce on Mynews post 2QFY22 results briefing, as we expect
it to remain in losses in FY22-23F due to a prolonged CU gestation period.
? We believe shortage of manpower at Mynews is a near-to-medium term
impediment to turn around FPC, and a headwind for its store expansion plan.
? To fund its CU expansion, we also expect Mynews to laden its balance sheet
with higher net gearing (higher interest costs); equity cash call on the cards.
Persistent shortage of manpower to further delay profitability
? Mynews shared that the lack of sufficient manpower is hampering its food processing
centre’s (FPC) utilisation rate (c.60% currently, maintains breakeven target of c.70%
by end-FY22F) given the lack of workers to ramp up production to support its
expanding store network. To circumvent this issue, Mynews said it has outsourced
certain food product categories to third-party suppliers as a short-term measure, which
could affect food quality, in our view. Nonetheless, it disclosed that FPC’s 1HFY22
revenue has reached c.120% of FY21’s total revenue due to higher fresh food
contributions from its CU operations, though it remained in losses at RM4.5m. Mynews
is expecting c.200 additional foreign workers in Aug 22 to partially ease the labour
shortage issue and support its store expansion.
? While Mynews aims to gradually increase the number of stores (especially CU)
operating with longer hours (e.g. 24-hours, in line with its competitors), the current
labour shortage remains a major impediment to executing its plans. As a result, we
believe this could be a drag on sales growth moving forward.
Gestation period for CU operations could drag out until FY24F
? While Mynews remains steadfast in its goal to open 100 CU stores p.a. (96 CU outlets
currently, and on track to meet its targeted 130 CU outlets at end-FY22F) and shared
that some of its earlier CU stores have achieved profitability (which we believe to be at
the EBITDA level), we still expect its CU operations to remain loss-making at least until
end-FY23F due to elevated operating costs, depreciation and finance costs to persist
in upcoming quarters due to its aggressive CU expansion plan.
A weaker operating environment ahead
? Given the minimum wage hike and rising input costs, Mynews shared that it may hike
prices across certain product categories to pass on the costs. While we take comfort in
its ability to raise prices, it could come at the expense of sales volume going forward in
view of intensifying competition and rising inflationary pressures.
? Mynews currently has 463 myNEWS stores (including 15 myNEWS SUPERVALUE)
and 14 WHSmith (expects to open another 5 in coming quarters). It also shared that
revenue from myNEWS outlets has achieved c.80-90% of pre-pandemic levels and
WHSmith operation likely broke even in May 22. That said, the labour shortage, rising
building material prices and fierce competition could weigh on Mynews, in our view.
Foresee a weaker balance sheet, with higher interest costs
? Mynews shared that it will continue to opt for gearing up its balance sheet (from
c.0.33x net gearing as of 2QFY22 to 0.5-0.7x) to fund its aggressive CU expansion,
which we expect to result in higher interest expenses amidst a rising interest rate hike
cycle. Mynews does not discount the possibility of an equity cash call as well.
We reiterate a Reduce call with an unchanged TP of RM0.33
? With no surprises from the briefing, we keep our FY22-24F estimates intact. We
reiterate Reduce with TP of RM0.33 (1.0x P/NTA, 2 s.d. below 5-year mean P/NTA of
2.9x). The discount is to account for intensifying competition in the CVS space, weaker
business fundamentals, and higher net gearing profile (a risk to rising interest rates).
? Key derating catalysts: higher-than-expected operating costs, persistent shortage of
labour delaying FPC’s turnaround plan. Key upside risks: shorter-than-expected
gestation period of its CU operations, lower-than-expected operating costs.