• Keep BUY and MYR0.81 TP, 26% upside. Mynews’ 1HFY24 (Oct) results met expectations, with 2QFY24 core earnings showing improvement QoQ despite softer seasonality during the fasting month. The consolidation of CU and Mynews management teams has consistently improved sales and GPM through stronger bargaining power and an enhanced product assortment. We believe valuation should re-rate with the progressive contributions from Mynews, alongside the turnaround of CU and food processing centre (FPC), driving the recovery of the profit base to pre-pandemic levels.

• Within ours but exceeding consensus expectations. 1HFY24 core profit of MYR4.4m (1HFY23: -MYR9.1m) met 34% and 47% of our and consensus forecasts, and we anticipate 2HFY24 earnings to show a more significant turnaround, driven by CU's narrowing losses. Note that we adjusted for the property, plant, and equipment (PPE) written off and the loss on disposal of PPE amounting to MYR1.4m to arrive at the core profit.

• Results review. YoY, 1HFY24 revenue rose 8.4% to MYR388.3m driven by the contributions from six new stores (601 stores in total) and improvements in overall in-store sales, thanks to improved product assortment. 1HFY24 GPM expanded by 3.3ppts to 37.4%, driven by better wastage control and increased bargaining power with suppliers following the consolidation of the management teams of Mynews and CU. Meanwhile, FPC’s 1HFY24 losses narrowed to MYR1.6m from MYR5m. QoQ, 2QFY24 sales dipped slightly by 1.4% to MYR192.8m due to weaker seasonality affected by the Ramadan month and shorter operating month in February. However, 2QFY24 core earnings surged 46.2% QoQ to MYR2.6m, driven by the aforementioned GPM expansion.

• Outlook. We anticipate CU’s losses will continue narrowing and reach breakeven by end-FY24, thanks to the consolidation of CU and Mynews management teams, which has yielded synergistic benefits resulting in stronger bargaining power and an improved product assortment. This should propel group profits to pre-pandemic levels once CU is no longer a drag on earnings. Meanwhile, Mynews has demonstrated consistency and strong earnings delivery, and we believe the focus on expanding this brand will be the key driver for sustainable profitability moving forward. The FPC utilisation rate is also expected to improve from the current breakeven level due to stronger sales volume from the expansion with 100 new stores (70% Mynews, 30% CU) in FY24.

• Forecasts and ratings. Post results, we make no changes to our earnings forecasts and DCF-derived TP of MYR0.81 (inclusive of 2% ESG premium) as results were in line. Our TP implies 20.2x FY25F P/E, which is -1SD from its pre-pandemic P/E mean (figure 2). Key risks: Delays in CU’s turnaround and weaker-than-expected consumer sentiment.

Source: RHB Research - 24 Jun 2024