• Yee Lee’s 1QFY18 core earnings surged 39.4% yoy to RM9.2m from RM6.6m despite lower revenue reported.

• Overall, 1QFY18 core earnings were in line with ours and consensus estimates making up at 20.2% and 21.7% respectively.

• Maintain HOLD recommendation for Yee Lee with TP of RM2.39. Our target price is based on an average valuation methodology of 10x PER and DCF (WACC: 9.8%, terminal growth rate: 3%).

Earnings within expectation

Yee Lee’s 1QFY18 core earnings surged 39.4% yoy to RM9.2m from RM6.6m despite lower revenue reported. This was achieved on the back of lower net opex which saw EBITDA margin expanding by 119bps to 5.6% from both its manufacturing and trading divisions. Overall, 1QFY18 core earnings were in line with ours and consensus estimates making up at 20.2% and 21.7% respectively.

Lower qoq earnings recorded

On qoq basis, revenue rose 7.5% to RM276.8m from RM257.4m previously, driven by higher sales from trading segment ie. beverages (bottled water and energy drinks). However, the revenue growth was offset by lower contribution from its associate company, Spritzer Bhd to RM1.9m from RM5.4m which dragged its core earnings to RM9.2m, down by 31.1%.

Better sales from trading division

Trading division which represents 76% of total sales, grew 7.2% yoy owing to recovery of sales of bottled water and energy drinks, coupled with higher sales of Campbells’ and Munchy’s product. Meanwhile, both manufacturing and plantation divisions fell 11.5% and 40.9% yoy. The decline in manufacturing division was attributable to lower sales of palm based products. Despite lower revenue recorded, the manufacturing division’s PBT grew 20.7% given a better profit margin from palm oil refinery. The drop in sales for plantation division sales was due to both tea and oil palm plantations which have yet to turn around. We expect trading division’s performance to recover as we believe that consumer sentiment is set to improve due to revision of GST rate to 0% from 6% effective 1 June 2018.

Maintain HOLD at a TP of RM2.39

We maintain our HOLD recommendation with TP of RM2.39. Our target price is based on an average valuation methodology of 10x PER and DCF (WACC: 9.8%, terminal growth rate: 3%).

Source: BIMB Securities Research - 31 May 2018