Result

• Stronger-than-expected 3QFY19. Oriental Food Industries (OFI) chalked up a core net profit of RM5.1m in its 3QFY19 results, up 16.9% yoy and more than doubled qoq. Still, 9MFY19 core profit (after excluding realized and unrealized forex gains) was down 27.5% yoy. The 9M results were above our expectation as it already met our full year core net earnings estimate. The stronger-than-expected earnings were mainly due to commendable gross / operating margins achieved (actual 9MFY19: 18.3%/7.0% vs our forecast: 17.0%/4.5%) while 9M revenue was within our estimate (accounting for 75% of full year revenue).

Comment

• Better yoy. The Group posted a better yoy performance mainly attributable to higher topline (+7.9% yoy) especially from its export markets (+27.7%) coupled with stronger operating margin achieved (+7.1ppts) pursuant to lower selling & distribution expenses. However, the Group achieved weaker 9M results mainly due to lower gross margin (- 2.3ppts) as affected by higher raw material and labour costs during 1HFY19 as well as higher tax expenses (9MFY19 effective tax rate of 26.2% vs 18.3% in 9MFY18).

• Stronger qoq. OFI’s earnings soared qoq, mainly attributable to better gross margin (+5.3ppts). In addition, the Group also recorded a higher topline (+9.9%) during this quarter underpinned by local sales, up 12.7%. We reckon that the worst is over for the Group and foresee the Group’s margins to recover gradually moving forward.

• Declared third interim dividend. The Group has proposed a third 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 1.5sen/share for this financial year.

• On-going expansion plans. OFI is currently making machinery acquisitions under its expansion projects for new product lines. The management expects these new lines will contribute positively towards the growth and profitability of the Group. These programs are expected to be completed in stages in the next few years.

Earnings Outlook/Revision

• We revise upwards our core net profit forecasts for FY19F and FY20F by 49.5% and 18.8% to RM14.0m and RM15.6m respectively following increase in our margins assumptions.

Valuation/Recommendation

• Upgrade to BUY from HOLD on OFI with a higher target price of RM0.85 (from RM0.66) following our earnings upgrade. Our revised target price is now based on PE multiple of 14.6x FY2019F EPS, which is -0.5 SD below its mean PE. We reckon that the worst is over for the Group and foresee the Group’s margins to recover gradually moving forward. Hence, we advise investors to buy on weakness as seeing value re-emerges.

Source: JF Apex Securities Research - 22 Feb 2019