Period  3Q14/9M14

Actual vs. Expectations 9M14 net profit of RM75.9m (-28.3% YoY) was considered within expectations despite accounting for only 67.5% of both our in-house and consensus estimates as we foresee stronger 4Q14 ahead, backed by the easing raw material prices.

Dividends  The Group declared a total net dividend of RM1.10/share (50 sen interim, 60 sen special), bringing YTD DPS to RM2.20, which is in line with our expectation. The DPS translates into a yield of 4.8% based on the latest closing price.

Key Results Highlights YTD, 9M14 revenue grew marginally by 2.3% to RM736.4m, mainly driven by the price increase in January and June. Net profit, however, slid 28.3% to RM75.9m with the net margin compressed to 10.3% from 14.7% due to the higher comparable raw material prices vis-à-vis 9M13.

 YoY, 3Q14 revenue saw a decline of 8.8% to RM240.5m despite an upward adjustment in selling price in June, with the weaker demand on the back of higher selling prices as well as the soft consumer sentiment dragging down the sales volume. Meanwhile, net profit recorded a steeper dip of 32.5% to RM28.5m, no thanks to higher comparable dairies commodities price and the lower sales volume.

 QoQ, 3Q14 revenue slid 10.3% following the weak sales volume partly due to the fasting season in the quarter and the reasons mentioned above. However, net profit managed to jump 17.6%, aided by more favourable raw material prices and better costs efficiency, which lifted net margin by 2.9ppt to 11.9%.

Outlook  We are disappointed with the 3Q14 results as lower milk powder prices, QoQ, did not translate into a better earnings growth as anticipated, with the worse-than-expected dip in sales volume putting a dent to the earnings.

 We maintain our negative stance on the company as we foresee the sales volume to continue the downtrend in view of the tough and challenging operating environment with consumer spending being undermined by the high costs of living.

Change to Forecasts We made no changes to our earnings forecasts despite the weaker-than-expected numbers as we expect 4Q to be stronger in view of the declining raw material prices.

Rating Maintain UNDERPERFORM

Valuation  We maintain our Target Price of RM44.22, pegged to 22.1x FY15E PER which is -1 SD below its 5-year mean PER.

 Current valuation is lofty at 23x FY15E PER with FY15E net profit still representing a decline of 7.4% if compared to FY13.

Risks  Weaker-than-expected consumer sentiment.

 Exorbitant hike in raw material prices.

Source: Kenanga