- We reiterate our HOLD call on Guinness Anchor Bhd (GAB) with an unchanged fair value of RM14.00/share. GAB reported a decent 1QFY15 net profit of RM55mil which met both our and market expectations. No dividend was declared for the quarter.

- The group’s 1QFY15 net profit rose 16% QoQ despite registering a 4.8% decline in revenue.

- Although this is the second time since FY04 that GAB reported a sequential decline in its 1Q revenue (the last being in 1QFY14 when revenue fell by 21%), we are not too concerned as it was mainly due to timing. The bulk of sales had been registered in the preceding quarter, whereby 4QFY14 revenue rose 11% when a decline is usually posted.

- The lower turnover also confirms our earlier view that MLM volumes would not be considerably boosted by the year’s special world event – the FIFA World Cup, which was held in Brazil in June/July – given the unfavourable match times.

- That said, the presence of such a large scale event had allowed GAB to reduce its commercial spend during the quarter to be re-invested in A&P activities during the quieter months to support its sales.

- This, together with cost savings from its efficiency programmes, had resulted in an 8% QoQ decline in GAB’s operating expenses and a 3.1ppt-expansion in its EBIT margin.

- On a YoY basis, GAB’s revenue increased 21%, underpinned by its stronger portfolio (better pricing and brand mix) as well as higher volumes (a smaller contraband threat and slight recovery in consumer sentiment).

- That said, its bottom line grew by a slower 10% YoY as GAB had to pay higher excise duties and sales taxes from November 2013 when the Customs expanded the valuation base for the taxes.

- Earnings aside, we note that GAB had in October introduced its first super-premium label, the Affligem, in line with its ‘premiumisation’ strategy. We expect volumes to trend upwards given its novelty factor and the segment’s low price sensitivity. However, contribution to earnings is still insignificant although this may help support margins.

- While we believe the upcoming festivities will encourage growth in MLM volumes, we remain cautious post the CNY season given the double negatives of a seasonally slow quarter and uncertainties following the implementation of the GST in April 2015. As such, we are maintaining our flat MLM volume growth assumption for FY15F.

- Valuation-wise, the stock is currently trading at a fair FY15F PE of 20x, which is within +1SD of its 5-year mean of 17x. Our fair value implies a PE of 21x.

Source: AmeSecurities