RHB Retail Research

Author: rhboskres   |   Latest post: Thu, 20 Feb 2020, 5:00 PM


Apollo Food - in Need of New Earnings Driver

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Stay NEUTRAL with a new P/E-based MYR3.40 TP from MYR3.65, expected total return: -2.6%. Apollo Food’s 2QFY20 results were below expectations, mainly due to weaker sales and higher raw material costs. We are imputing more conservative sales growth assumptions, lowering FY20- 22F (Apr) earnings by 8.6%/7.5%/6.8% respectively. Despite the lacklustre sales growth and absence of earnings growth drivers, we believe its generous dividend payout – backed by a sturdy balance sheet – should continue to support the share price.

Below expectations. Apollo recorded 2QFY20 core net profit of MYR3.15m (-9.2% YoY, +5.6% QoQ), bringing 1HFY20 core net profit to MYR6.4m (-31% YoY). This is below our expectations, accounting for just 37% of our previous full-year forecast. The group’s topline was lower than expected, which we believe was affected by a challenging environment and intense competition. No dividend was declared.

Growth to remain flat. Despite the soft market conditions and strong competition, management remains optimistic in maintaining its market position and profitability. Apollo would continue to implement cautious measures, improve its operational efficiency and focus on product quality. However, the company lacks a large-scale expansion plan to drive its earnings higher. We expect the flattish growth trend to continue. Higher material and FX volatility remain, posing challenges to the company.

Key risks and forecasts. We cut our FY20F-22F earnings by 8.6%/7.5%/6.8% respectively to reflect more conservative sales growth assumptions. Sharper-than-expected rises in input costs and diversification into new product lines could pose risks to our recommendation.

Maintain NEUTRAL with lower TP of MYR3.40 (from MYR3.65) - derived from an unchanged target P/E of 17x (5-year mean) and revised FY21F (from FY20F) earnings. We think the valuation is justified, given the lack of growth drivers and Apollo’s susceptibility to fluctuations in raw material costs. However, this is balanced by the attractive dividend yield of 5.4% on offer, backed by the company’s healthy cash flow generation and sturdy balance sheet. These factors should continue to support the share price.

Source: RHB Securities Research - 30 Dec 2019

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Labels: APOLLO

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