Period  4Q14/FY14

Actual vs. Expectations  FY14 net profit of RM109.8m (-20.6%) was within both our in-house and consensus’ expectations.

Dividends  No dividend was declared as expected.

 However, FY14 DPS of RM2.20 (vs FY13: RM2.60) was within our expectation.

Key Results Highlights  YoY, FY14 revenue of RM1b was flattish which was likely affected by product prices increase in January and June as the sales volume was dragged down by the higher selling prices. Meanwhile, net profit of RM109.8m was 20.6% lower mainly due to the lower gross profit (-13%) on the back of higher raw material costs, which brought gross margin down by 5.6ppt to 32.9%.

 QoQ, 4Q14 revenue rose 9.7% to RM263.8m, due to the normalizing sales volume as 3Q14 was affected by the fasting season as well as the negative reaction to a price increase in June. As a result, net profit surged 18.9% to RM34m, further lifted by comparatively more favourable raw material costs.

Outlook  Moving forward, the earnings growth outlook will still be underpinned by the price movement of milk powder. Despite the price weakness in 2H14, the milk powder price has rebounded by 18.3% to 44.1% in Feb 2015 from end-2014, showcasing the price volatility.

 Thus, we expect the better margins to be sustained into the next quarter to take the lower raw material costs in end-2014 into account due to the 3-6 months lagging period.

 Meanwhile, we also expect the sales volume to gradually normalize as consumers adapt and adjust to the price increase as well as the downsizing of the milk packaging (from 250ml/pack to 200ml/pack) on the back of growing health awareness as average dairy consumption of Malaysian is low at 2 servings/week as opposed to 2 servings/day recommended by World Health Organization (WHO).

Change to Forecasts  We revised down FY15E earnings to account for the sharp rebound in raw material prices, which resulted in 1ppt gross margin contraction and 6% lower net profit. We also roll out our FY16E earnings, which reflect net profit growth of 9.4%.

Rating Downgrade to UNDERPEFORM (from Market Perform)

Valuation  Correspondingly, with the earnings cut, our TP is downgraded to RM43.52 (from RM44.22), based on 23.2x FY15E EPS, which implied 3-year mean. Share price rose 10.5% since our last issued report, offering negative return thus warranting a rating downgrade

Risks to Our Call  Lower-than-expected raw material prices.

 Stronger-than-expected consumer sentiment. 

Source: Kenanga