Significantly Stronger Earnings Contribution From the F&B Division Is Expected to be Led by Newly Secured Contracts With New Corporate Clients. Due to This, We Are Anticipating Bottom Line Growth of 23.1% in FY20 YoY. We Initiate Coverage on FocusP With a BUY Call and TP of RM0.70 Based on a PE of 15x Tagged to Mid-FY21 Earnings.

Company background. FocusP operates optometry retailers, consumer facing bakeries under the name ‘Komugi’ and a central kitchen bakery which supplies products to external clients including convenience stores and cafes. In addition to this, it also operates a franchise division which franchises out their optical retailer trading names and F&B franchise. FocusP was listed on the ACE market on Aug 2010.

Growth in F&B corporate sales to boost profitability. Anticipated sales growth in the newly secured agreement with corporate clients, growth in the number of corporate client’s outlet numbers (as well as increasing their order size from 4 SKUs to 6 SKUs) beginning in Feb 2020 is expected to drastically increase profitability. From EBIT losses of -RM1.8m in FY18, we expect the F&B division to contribute EBIT of RM3.5m in FY20 based on the increased corporate sales in the F&B division. Note that the F&B division managed to turn profitable in 3Q19.

Opening of new optical stores and +3.5% SSSG going forward. Currently, FocusP operates 182 (109 in-house) optical retail outlets. They intend to open a further 6 outlets in FY20 (3 under the trading name Focus Point and 3 under the trading name Whoosh). This is expected to incur capex of RM3m. Over the previous 3 years, the optical business recorded an average SSSG of 5.1%. The robust SSSG was mainly due to growth in contact lenses sales. Going forward, we project a conservative SSSG figure of 3.5% driven by the continued growth of contact lens sales.

Decent dividend yield. FocusP has outlined a dividend policy of a minimum of 30% payout of PAT. However, based on the 1.875 sen already paid out in FY19 (which represents ~51.5% of our forecasted FY19 PAT), we expect the company to pay 2.0 sen per share going forward (45%/ 40% of forecasted FY20/21 PAT). This represents a healthy dividend yield of 3.9%.

Forecast. FocusP’s 9M19 core PAT of RM5.2m grew 95.7% YoY. This was mainly due to better sales from the optical division as well as the F&B division turning profitable. The turnaround in the F&B division’s profitability was due to the higher sales to corporate clients that began in 4Q18. Losses in the F&B division narrowed in 1H19 before turning profitable in 3Q19. We expect FocusP to report core PAT of RM8.0m in FY19 based on robust 9M19 earnings as well as rebates expected in 4Q19 from major suppliers which is linked to FocusP hitting certain sales targets during the year. Note that 4Q19 PAT accounted for 62.7% of the group’s full year earnings. Going into FY20, we project bottom line to increase by 23.1% due to significantly stronger performance in the F&B division from the increased corporate sales mentioned above.

Initiate with BUY, TP: RM0.70. We initiate coverage on FocusP with a BUY rating and TP of RM0.70. This is based on a mid-21 EPS tagged to a PE of 15x. This valuation multiple represents a 20% discount to FocusP’s listed peers. We reckon this discount is justified given FocusP’s smaller market cap vs. its peers.

Source: Hong Leong Investment Bank Research - 14 Jan 2020