• Keep BUY, with new MYR0.81 TP from MYR0.68, 27% upside and c.2% FY25F (Oct) yield. Mynews' current valuation of 15.9x FY25F P/E appears attractive compared to its convenience store (CVS) peers. We forecast FY25 net profit to reach pre-pandemic levels of MYR28m once CU is no longer a drag on earnings. With the worst likely behind, the end of CU's gestation period, progressive contributions from Mynews, and the turnaround of its food processing centre (FPC) should drive a re-rating of the stock.

• CU nears breakeven. The consolidation of the management teams of Mynews and CU, leveraging their combined scale, has resulted in stronger bargaining power with suppliers (improving group GPM by 3ppts YoY to 36.3% in 1QFY24). This consolidation has also increased CU's sales by improving the product assortment (Figures 5 and 6) to better align with customer preferences. Additionally, ongoing cost optimisation efforts – such as internalising logistics for more efficient route planning and enhancing wastage control and maintenance expenses – have reduced CU's losses (Figure 2). We believe CU is at the tail end of its gestation period and is poised to break even by FY24.

• Mynews’ consistent performance. With the FPC’s labour shortage resolved, Mynews expanded its fresh food offerings (now >10% of sales, up from <10%). This led to increased foot traffic and a 10% larger basket size, as noted by management. Based on our estimates (Figure 2), FPC’s PBT has recovered to pre-pandemic levels and has shown consistent performance over time likely due to its versatility in terms of product offerings and store layouts. With a targeted expansion of 100 stores in FY24, focusing the majority of it on the Mynews brand should drive consistent earnings growth moving forward. Additionally, with 34 SuperValue stores as of 1QFY24, the group plans to gradually convert some Mynews stores into SuperValue outlets to meet growing demand for convenient mini-marts. Meanwhile, FPC’s losses narrowed drastically to MYR0.2m in 1QFY24 (Figure 2) due to stronger sales volume, and its utilisation rate is expected to increase from the current breakeven level of 70%, in line with the opening of new stores.

• Beneficiary of positive sector development. The revised salary scheme for civil servants and the restructuring of the Employees Provident Fund (EPF) accounts are expected to benefit CVS players. Additionally, the increasing influx of tourists (1Q2024: 5.8m or +33% YoY) will boost foot traffic in CVS outlets, especially at WH Smith locations in airports.

• Forecasts and ratings. We make no changes to our earnings forecasts but raise Mynews' DCF-derived TP to MYR0.81 (justification on page 5). Key risks: Delays in CU’s turnaround and weaker-than-expected consumer sentiment.

Source: RHB Research - 12 Jun 2024