PETALING JAYA: MyNews Holdings Bhd may go through a painful transition due to the closure of some of its outlets while the gestation period for its South Korean convenience store chain, CU, is expected to be at least two years, says CGS-CIMB Research.

       The company expects to close more than 20 MyNews outlets located in hypermarkets due to the change of management for the hypermarkets.

       About 90 MyNews stores were closed since the start of pandemic. Twenty-four of them were in Peninsular Malaysia during the first quarter of financial year 2022 (1Q22).

       However, this has been partially offset by the opening of 80 CU outlets.

       Even so, the research firm expects the CU stores to remain loss-making as they grapple with high start-up costs given the current operating environment compared with its established peers.

       “We believe there is a potential near-term earnings recovery from its existing MyNews stores although the recovery in footfall will not be able to offset the losses from its food processing centre (FPC) and CU segments this year,” said CGS-CIMB Research.

       The company planned to open between 150 and 160 CU stores by the end of its financial year.

       “The company expects marketing costs to stay elevated due to the promotion campaign for the CU brand, minimum wage hike requirement, and higher depreciation, thus prolonging the gestation period,” the research house added.

       The company is considering a possible price hike due to the rising raw material prices.

       The research house said the company could increase its finance costs due to the gearing up of its balance sheet from 0.28 times in 1QFY22 to between 0.5 times and 0.7 times.

       “MyNews also does not discount the possibility of an equity cash call,” the research house said.

       Although the company’s FPC narrowed its losses in the first quarter, the research house expects it to remain loss-making for the rest of the financial year as the wastage rate remains above 10% given the shorter shelf life of fresh-food products.

       In addition, the FPC’s utilisation rate was only 55% in the 1QFY22.

       However, the key upside risks are the faster-than-expected turnaround of MyNews’ FPC on strong CU store outperformance and expansion plans, lower-than-expected operating costs, as well as the better-than-expected earnings recovery from the MyNews outlet operations, according to the research house.