Result

• Core earnings below expectation. Oriental Food Industries (OFI) recorded a core net profit of RM2.2m in its 2QFY19 results (after excluding realised and unreliased forex gains of RM0.6m during the quarter), which declined 53.6% yoy and 0.9% qoq. 1HFY19 core profit was down 49.3% yoy, which was deemed below our expectation as it accounted for 39% of our full year core net earnings estimate. The lower-than-expected earnings were mainly due to weaker gross profit (GP) margin (actual 1HFY19: 16.4% vs our forecast: 20%) amid 1H revenue was within our estimate (48%).

Comment

• Sluggish yoy results. The Group posted a weaker yoy result for its 2QFY19 mainly due to lower GP margin recorded, -5.7ppts as a result of higher raw material and labour costs, amid flat revenue, +0.5%. Furthermore, the higher tax expenses during the quarter (against tax credit in 2QFY18) also weighed on its bottom line. Likewise, for its 1HFY19 core earnings, the Group recorded lacklustre yoy results no thanks to abovementioned reasons.

• Uninspiring qoq performance. Despite achieving higher revenue of +10.3%, the Group posted flattish core earnings growth of -0.9%, mainly attributable to higher cost of sales and administrative expenses. Notably, the local sales surged strongly during this quarter, +24.4% qoq and 51.2% yoy, thanks to the tax holiday.

• Declared second interim dividend. The Group has proposed a second interim dividend of 0.5sen/share for this quarter, which is lower than 1.0sen/share in a year ago. This brings the total dividend declared to 1.0sen/share.

• New products and flavours to boost topline. The Group launched its biscuits products early this year with different flavoured crackers and biscuits under the ‘Zess’ brand name. Also, the Group splashed out RM15m capex on machinery & equipment for the production of cookies which came into production middle of this year. 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 18.0% and 17.2% to RM9.4m and RM13.1m respectively to better reflect its prevailing high operational costs.

Valuation/Recommendation

• Maintain HOLD on OFI with a lower target price of RM0.66 (from RM0.80) 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 Nov 2018