• Keep BUY and MYR0.68 TP, 25% upside. We emerged from Mynews’ briefing feeling optimistic on its outlook. The change in strategy to consolidate the management teams of Mynews and CU has led to promising sales and margin improvement. Moving ahead, the robust expansion of the Mynews brand, coupled with the reduction of losses at CU and anticipated breakeven of the food processing centre (FPC) are poised to sustain the group’s turnaround.

• CU's turnaround should propel group profit to pre-pandemic levels. Recall that the group achieved MYR24-29m profit pre-pandemic, but the introduction of CU in 2021 resulted in continuous losses throughout its gestation period. Over the three years, management has learned from its mistakes and adapted a new strategy: It consolidated the management teams of CU and Mynews to leverage the latter's local expertise in running an international brand. This resulted in GPM improvement given the more synergistic benefits and cost savings due larger combined scale, while also contributing to stronger sales through better product assortment. We highlight CU’s closest peer, FamilyMart, took three years to breakeven. With FY24 (Oct) marking the third year since CU's introduction (excluding the pandemic year), it is poised to break even. We forecast profit to return to pre- pandemic levels in FY25F, with CU breaking even by end-2024.

• Mynews: Steady as it goes. According to Nielsen, Mynews has been continuously gaining market share, with sales growing despite the overall decline in the convenience store sector. This is attributed to its continuous fine tuning of product offerings and the introduction of more quality fresh food items after securing sufficient labour for FPC, which has led to better consumer traction. Management guided to aggressively expand this profitable brand to further offset narrowing losses from other business units given its track record of resilient performance. We believe this will be further aided by a new shareholder providing valuable insight and suggestions to the business. Mynews also plans to introduce new Maru Coffee Café (details on page 3), leveraging on the popularity of its coffee and fresh food products.

• FPC and WH Smith: Almost there. FPC's losses narrowed to MYR0.2m in 1QFY24, smallest losses since its establishment in 2019. We learnt that this was thanks to stabilised input costs, and management being able to negotiate better terms with suppliers due to stronger sales volume. We anticipate FPC utilisation will continue to ramp up in line with store expansion and higher in- store sales. On the other hand, WH Smith’s earnings are currently at c.70% of pre-pandemic level as it was impacted by some airport renovation, but we expect it to recover post renovation and increasing tourist arrivals.

• Forecasts and ratings. We make no changes to our earnings forecasts and DCF-derived TP of MYR0.68 (inclusive of a 2% ESG premium). Our TP implies 31.2x CY24F P/E, which is +1SD from its 5-year mean. Key risks: Delays in CU’s turnaround and weaker-than-expected consumer sentiment.

Source: RHB Research - 29 Mar 2024