Result

• Tepid 1QFY20. Oriental Food Industries (OFI) recorded a core net profit of RM1.8m (after excluding realized and unrealized forex gains) in its 1QFY20 results, slumping 18.4% yoy and 53.0% qoq. We deem the 1Q result as below our expectation as it constitutes 13% of our full year core net earnings estimate (vs 1QFY19 core profit meeting 17% of actual full year result). The weaker-than-expected earnings were mainly due to lower top line and margins achieved.

Comment

• Lower yoy…… The weaker yoy performance was mainly attributable to lower topline (-5.1% yoy) which was dragged down by its export markets (-12.2%) despite better domestic sales (+10.0% yoy). The higher selling & distribution expenses also exacerbated the fall in profit as evidenced by the Group’s EBIT margin of 4.6% during this quarter, down 1.9ppts from 1QFY19’s 6.4%.

• ……and qoq. Likewise, OFI’s earnings also slid qoq no thanks to lower topline (-2.9% qoq) coupled with higher selling & distribution expenses as EBIT fell 19.4% qoq. Furthermore, OFI incurred higher effective tax rate during this quarter against tax incentive enjoyed in the preceding quarter, which also weighed on the Group’s bottom line.

• Lower first interim dividend as compared to a year ago. The Group has proposed a first interim dividend of 0.3sen/share for this quarter, which is lower than 0.5 sen/share in 1QFY19. We believe this was due to weaker earnings achieved thus far and anticipated tougher operating environment moving forward.

• Challenging export sales. We envisage the Group to face challenging outlook in its sales to overseas markets amid prevailing global economic slowdown. To recap, for FY19, the Group achieved 3% sales growth in the snack category, outperforming the growth in sales of cakes and potato crisps. This was mainly spurred by the rising trend of sales for the snack products in overseas markets. Domestically, product brand names such as ‘Super Ring’, Jacker, Rota and Oriental are well-known among households in Malaysia. Meanwhile, OFI launched its biscuit products under the brand name ‘Zess’ to the market in order to garner more market share in this segment.

• Not resting on its laurels. Moving forward, the Group strives to: 1) Launch new type of products, 2) Enhance the quality and taste, and 3) Adopt advanced

technology and fully automated production lines to accommodate both local and overseas demands. In fact, OFI is currently making machinery acquisitions under its on-going 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 slash our FY20F/FY21F net profits forecasts by 21.9%/20.8% to RM11.1m/RM12.0m respectively after lowering our assumptions on export sales and operating margins.

Valuation/Recommendation

• Downgrade to HOLD from BUY on OFI with a lower target price of RM0.73 (RM0.85 previously) following our earnings cut. Our revised target price is pegged at PE multiple of 15.7x FY2020F EPS, which is -0.25 SD below its mean PE. We opine that OFI is facing double whammy of rising operating costs and declining export sales. Also, the stock renders unattractive dividend yield of over 2% for FY20F which is relatively lower than other consumer stocks.

Source: JF Apex Securities Research - 29 Aug 2019