Result

• Core earnings below expectation. Oriental Food Industries (OFI) recorded a core net profit of RM2.3m in its 1QFY19 results (after excluding realised and unreliased forex gains of RM1.1m during the quarter), which declined 44.2% yoy but increased 66.0% qoq. The core profit was below our expectation as it accounted for 16% of our full year core net earnings estimate. The lower-than-expected earnings were mainly due to weaker GP margin achieved but 1Q revenue was within our estimate (23%).

Comment

• Lower yoy. The Group posted a weaker yoy result mainly due to lower GP margin recorded, -3.2ppts as a result of higher raw material costs, amid flat revenue, +0.1%. The higher effective tax rate of 22% during the quarter (vs 1QFY18: 15.4%) also weighed on its bottom line. The lacklustre top line growth during this quarter was mainly due to sluggish local sales as the Malaysian market was down 12.9%. We believe the lower revenue was partly due to the Group’s first adoption of MFRS 15 where some promotional expenses have been reclassified as a deduction from revenue in 1QFY19.

• High qoq. However, the Group chalked up better qoq performance mainly attributable to higher operating expenses in respect of cost incurred for foreign worker levy during 4QFY18. Again, we witnessed the slump in local sales of -32.1% during this quarter, which dragged down overall revenue of the Group by 8.7%.

• Proposed first interim dividend. The Group has proposed a first interim dividend of 0.5sen/share for 1QFY19, which is lower than 1.0sen/share in 1QFY18. For the full year FY19, we envisage OFI to pay out 2.5sen/share (equivalent to dividend payout of 52%), translating into a yield of 2.9%.

• Growth momentum in wafer segment expected to continue. In FY18, we witnessed an encouraging sales growth of 20.1% in the wafer category, outperforming the growth in sales of snacks and potato crisps. This growth was particularly spurred by the rising trend of sales for wafer. Hence, we envisage a higher utilisation rate for this product segment in FY19F.

• Launch of new products to boost sales further. The Group launched its biscuits products early this year with different flavoured crackers and biscuits under the ‘Zess’ brand name. Besides, the Group splashed out RM15m capex on machinery & equipment for the production of cookies which will come into production middle of this year and will be launched to market in 2HCY2018. However, it will take a few years for 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.

Earnings Outlook/Revision

• We revise downwards our core net profit forecasts for FY19F and FY20F by 19.3% and 8.9% to RM11.5m and RM15.8m respectively to better reflect its lower margins.

Valuation/Recommendation

• Maintain HOLD on OFI with a lower target price of RM0.80 (from RM1.00) following our earnings cut. Our revised target price is based on unchanged PE multiple of 16.7x FY2019F EPS, which is at it 3-year average PE. We do not foresee any immediate catalyst on the stock as the Group is now facing elevated operating costs.

Source: JF Apex Securities Research - 30 Aug 2018