While being hit by CMCO/MCO, sales at its optical stores were still relatively decent, given the circumstances. On the F&B division, its existing central kitchen facility ha s been granted HACCP certification, paving way to supply to a large café chain. We keep our forecasts unchanged but raise our PE multiple from 16x to 18.5x in line with listed retail peers. Our TP rises from RM0.68 to RM0.78. Despite the increase in TP, we downgrade FocusP from Buy to HOLD as we reckon it is now fairly valued. Note that since our last upgrade in Aug-20, the stock has surged 181.5%.

4Q20 earnings outlook. The reimplementation of CMCO2.0 restrictions alongside Covid-19 case resurgence resulted in lower foot traffic in retail areas in Oct/Nov, impacting FocusP’s optical division. However, management guided that sales have begun to pick up in Dec due to year end festive season. Seasonally, 4Q is FocusP’s strongest quarter as the optical division receives rebates from its major suppliers for meeting sales targets for the year (core PAT in 4Q18 and 4Q19 accounted for 62.7% and 47.7% of full year earnings, respectively). We expect FocusP to release 4Q20 results in mid-Feb.

MCO optical store sales update. We understand that FocusP’s optical stores were only shut for a brief period during the recent reimplementation of MCO 2.0 in mid-Jan after the government subsequently permitted optical stores to reopen. Despite being permitted to operate, we understand that sales are lower by ~20% due to lacklustre foot traffic in retail areas.

Second central kitchen expected to be up and running by mid-Feb 2021. With increasing order volumes from existing clients and apparent interests from new clients, FocusP’s current central kitchen has reached maximum capacity. By year end, we estimate FocusP’s second central kitchen to have a utilisation rate of 30% based on increased orders from existing customers as well as new client (mentioned below) coming on board. We believe the second kitchen will be able to generate up to ~RM5m per month from corporate sales at maximum capacity. The second central kitchen is estimated to be operational by mid-Feb.

Certification update. FocusP shared that their existing central kitchen facility has been granted HACCP certification. We are very positive on this news as FocusP had been in talks to supply a large café chain with baked goods pending HACCP certification. We understand the venture will amount to RM50k revenue per month for the time being, given FocusP will solely supply macarons to the client. We expect this figure to increase going forward as we reckon FocusP will start supplying new SKUs in the future. With regards to the second central kitchen, we understand FocusP will pursue ISO22000 certification. In order to supply to another large client (which has over 400 existing retail outlets). FocusP has guided that it expects ISO22000 certification to be granted by 3Q21.

Forecast. Unchanged.

Downgrade to HOLD. We expect the commencement of FocusP’s second central kitchen to accelerate the F&B division’s profitability. We like FocusP’s relatively MCO resilient business model, as we view optical sales as an essential rather than a discretionary purchase. Given FocusP’s status as a mid-cap consumer company, we raise our PE multiple from 16x to 18.5x (in line with listed retail peers), as such, our TP rises from RM0.68 to RM0.78 (after adjusting for 1 for 2 bonus issue). Despite our increase in TP, we downgrade FocusP from Buy to HOLD as we reckon it is now fairly valued. Note that since our last upgrade in Aug-20, FocusP has delivered a handsome return of 181.5%.

Source: Hong Leong Investment Bank Research - 4 Feb 2021