Result

• Core earnings in line with expectation. Oriental Food Industries (OFI) recorded 1QFY18 core net profit of RM4.1m (including forex loss of RM1.0m during the quarter), rising 13.6% yoy and 8.1% qoq. 1QFY18 results are within our forecast and constitute 21% of our full year earnings estimate.

Comment

• Better quarterly results. The better yoy performance was mainly attributable to higher revenue achieved, +5.4% yoy. On qoq basis, the higher earnings were mainly due to significantly lower effective tax rate during this quarter, 15% (vs 34% in 4QFY17) amid higher cost of sales as a result of higher raw material costs.

• Improvement in local sales. During this quarter, we saw significant improvement in local sales, up 14.3% yoy (vs Asia Pacific’s sales of +4.9% yoy and other export markets’ sales of -7.2% yoy). Overall, OFI’s topline was still mainly underpinned by export markets (64% vs 36% local sales in 1QFY17) with 45% from Asia Pacific alone.

• Better 2H. We envisage OFI to deliver moderately higher earnings in 2HFY18 with the commencement of operations for its new product, biscuit segment (estimated annual capacity of 10,800MT) and two additional potato crisps production lines (with estimated annual capacity of 3500MT). However, it will take 3-5 years for the new products, particularly the biscuits products, to reach their full capacity in view of time taken for marketing efforts, publicity of the products and acceptance of consumers in order to gain market share in a highly competitive biscuit business.

• Proposed first interim dividend of 1.0 sen/share. As usual, the Group will announce dividend for every quarter of the year. OFI has proposed an interim dividend of 1.0 sen/share for this quarter which will go ex on 11 Sept 17.

Earnings Outlook/Revision

• No change to our earnings forecasts.

• We estimate the Group’s FY2018F and FY2019F reported net profits to grow moderately by 6.7% to RM19.5m and 11.5% to RM21.8m, on the back of higher toplines, +7.5% yoy and 7.0% yoy respectively. Core net earnings wise (after excluding unrealised and realised forex gains of RM4.2m in FY2017), we envisage the Group’s FY2018F performance to surge by 29.3% yoy.
   
• We have imputed the contributions of the 2 new lines of potato snacks and 1 new line of biscuit production, which will commence operations in coming months, into our earnings forecasts.

Valuation/Recommendation

• Maintain HOLD on OFI with an unchanged target price of RM1.61, based on 17.7x FY2019F PE. The target PER is at the upcycle PE of the stock, i.e. +0.25 standard deviation (SD) above its 3-year mean PE of 16.7x.

• While we favour the Group as being a defensive stock that provides consistent dividend and stable earnings, coupled with its less cyclical nature of business, we opine that the stock is fully valued at this junction and renders limited upside with its unappealing dividend yield of less than 3.5%.

Source: JF Apex Securities Research - 25 Aug 2017