1H17 net profit of RM110.6m (-1%) is below estimate, dragged by weaker-than-expected sales but buffered by better margins from operational improvements. A 40.0 sen interim dividend was declared, broadly within expectations. While we leave estimates unchanged pending further details from a briefing, we are negatively bias on short-term prospects due to the slower-than-expected recovery of consumer demand.

1H17 net earnings below expectations. 1H17 results of RM110.6m is below our/consensus expectations, making up 37%/39% of estimates. We had expected stronger sales from 2Q17 to make up for 1Q17’s poor performance, which was dragged by forward buying from the earlier Chinese New Year festivities this year. The 40.0 sen dividend announced was broadly within our 90.0 sen estimate as we are looking for higher pay-out in 2H17.

YoY, 1H17 revenue of RM807.7m was lower than 2HCY16 by 12%, as prior year sales were stoked by further forward buying on anticipated price increases in Jul 2016 in addition to the lack of recovery in consumer spending habits in the current year. Operating profit only declined by 2% on better operating margin at 18.1% (+1.7 pts) owing to the group’s efforts in streamlining their operational and procurement processes. With more favourable effective taxes of 24% (-1.4 pts), 1H17 recorded a net profit of RM110.6 (-1%).

QoQ, 2Q17 revenue only grew slightly by 1% to RM406.6m, likely due to lower volume sales on the less premium brands in view of the prevailingly weak consumer sentiment. However, operating profits expanded to RM80.9m (+26%) at stronger margin of 20.0% (+3.7 pts), likely backed by improved sales proportion towards premium products in addition to the more effective cohesion on the group’s newer processes. Effective taxes were slightly lower in the quarter, leading to higher net earnings of RM61.6m (+26%).

Shifts in demand and operations. The decline in sales continued to coincide with poor consumer sentiment, particularly its wider scale beer products. However, the group has managed to keep demand alive via the introduction of fresh non-beer and stout products which we believe would sustain the group’s leading market position while premium brands are expected to remain sticky to consumers. The fruits from the group’s initiatives to improve cost and operational process appear to be bearing fruit and could benefit the group exponentially when consumer demand recovers to a healthy state.

Maintain OUTPERFORM with an unchanged TP of RM21.38. While we leave our FY17E-FY18E earnings estimates unchanged for now pending further details from the briefing today, our new earnings assumptions could have downside bias on weaker sales assumptions. Our unchanged TP of RM21.38 is based on our prevailing 19.0x PER FY18E (which is close to its 5-year mean PER). Risks to our call include: (i) better-than-expected non-premium sales, and (ii) lower-than expected pressure from commodity prices to the group.

Source: Kenanga Research - 27 Jul 2017