Result

• Core earnings in line with expectation. Oriental Food Industries (OFI) recorded 2QFY18 core net profit of RM4.8m (including forex loss of RM0.7m during the quarter). This brings its 1HFY18 core net profit to RM8.9m which is 10.1% higher yoy and the results are within our forecast as it constitutes 46% of our full year earnings estimate.

Comment

• Higher marketing and operating expenses. On a yoy basis, OFI achieved a lower reported net profit in 2QFY18 (-20.4%) mainly due to higher marketing and promotional expenses coupled with forex loss amid better topline of +22.0%. Also, we believe that the higher operating and administrative expenses were related to lower operational efficiency due to shortage of foreign labour and hiring costs in view of its expansion of production lines. Excluding the impact of forex fluctuations, the Group achieved higher core net profit of 7.4%. Similarly, OFI’s 1HFY18 reported net profit was down by 20.0% yoy as affected by the abovementioned reasons. Having said that, the Group managed to achieve better core net profit of +10.1% yoy after excluding the forex factor.

• Tax advantage. On a qoq basis, the higher core net earnings (+19.0%) were mainly attributable to tax incentives granted as well as deferred tax asset provision for certain temporary differences.

• Export-driven top line. OFI chalked up better export sales (Asia Pacific: +34.4% yoy, +16.0% qoq and Others: +91.0% yoy, +65.6% qoq) as compared to local sales in this quarter (-25.2% yoy, -28.3% qoq). Similarly, for 1H geographical breakdown on revenue, export market (Asia Pacific: +18.9% and Others: +36.5%) significantly outgrew local sales (-6.4%).

• Slightly better 2H. Despite the relatively high raw material costs and shortage of labour, OFI still managed to perform well in its GP margin (2QFY18: +2.2ppts yoy and qoq, 1H: +0.7ppts). We envisage the Group to deliver slightly better earnings in 2HFY18 underpinned by strong export sales and the introduction of its new biscuit product by end of this year.

• 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.

Earnings Outlook/Revision

• We revise down our core net profit for FY18 by 6.7% to RM18.2m after lowering our margin expectations. However, we keep our earnings forecast unchanged for FY19.

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 with its unappealing dividend yield of 3.1%.

Source: JF Apex Securities Research - 23 Nov 2017