• Within expectations. Yee Lee Corporation (Yee Lee) posted a 1Q18 core net profit of RM8.7m (+41.6% yoy, -14.0% qoq), in line with our expectation, representing 23% of our full-year forecast. Core net profit dropped 14% qoq due to 4Q18’s tax credit of RM1.5m. At the core PBT level (after deducting RM3.3m gains from net asset value increase in associate Spritzer for 4Q17), 1Q18 core PBT increased 35% qoq.

• Trading: Sales recovered and better product mix. In 1Q18, the trading segment’s sales rose 7.2% yoy and 13.6% qoq, on stronger sales of bottled water (largely due to higher ASP, water rationing in Selangor and hot weather), Red Bull energy drinks as well as Campbell and Munchy products. PBT margin increased 1ppt yoy and 0.2 ppt qoq as a result of a more favourable product mix.

• Manufacturing: Aided by better profit margin at palm refinery and narrowed losses from palm mill. Despite the better sales of aerosol cans and soft oils, the manufacturing division's sales was down 11.5% yoy, dragged by lower sales of palm cooking oil. However, PBT was up 21% yoy due to better margins from palm oil refinery and narrowed losses from palm oil mills on the fresh fruit bunches (FFB) price reduction scheme.

• Maintain HOLD. We expect Yee Lee’s trading segment to benefit from improved consumer sentiment (due to zero-rated GST), although we note that Yee Lee’s palm cooking oil is already zero-rated and its products are deemed a necessity. However, earnings at the manufacturing segment’s palm refinery and mills remain uncertain. Maintain HOLD with an unchanged target price of RM2.28, pegged to 12x 2019F PE for both the trading segment and the proportion of earnings from associate Spritzer, and 8x 2019F PE for the manufacturing segment. Our target price implies 11.5x 2018F PE and 10.7x 2019F PE. Entry price: RM2.10.

Source: UOB Kay Hian Research - 1 Jun 2018