Cloudy outlook for Yee Lee Corporation (YEELEE). In a recent press  report  (The  Star),  management  reckoned  that  the  weak consumer  sentiment  and  inflationary  pressure  from  GST implementation  from  1 st April  will  be  challenging  to  the  topline  as consumers adjust to the new tax regime going forward. In addition, the company will likely see marginal margins compression due to higher operating costs, leading to slight dip in earnings. Note that YEELEE’s trading division focuses on fast moving consumer goods (FMCG) such as cooking oil (‘Eagle’ and ‘Vesawit’ brands), mineral water (‘Spritzer’ brand), oral care, household and laundry detergent products.  As  trading  is  the  largest  revenue  contributor,  at  67.2% with a low PBT margin of 1.7% in FY14, overall earnings are likely to take a bigger hit in FY15.

FY14 earnings below our expectation. We were disappointed by YEELEE’s FY14 core net profit (CNP) of RM28.0m; reaching only 82.3%  of  our  estimate  of  RM34.0m.  YoY,  revenue  grew 4.9%  to RM690.5m  but  CNP  fell  22.8%  due  to:  (i)  margins  compression from  manufacturing  and  trading  division,  and  (ii)  lower  other operating income (-27.8%) from high base in FY13 that recorded a revaluation  gain,  while  partially  offset  by  stronger  associate contribution  from  Spritzer  (+21.5%)  due  to  water  crisis  in  some states. Overall, manufacturing earnings (PBT -27.3%) was dragged by  smaller  premium  of  palm  olein  vs.  CPO  prices  (FY14: RM120/MT  vs. RM161/MT in  FY13 and RM187/MT in FY12)and lower FFB processed, causing PBT margin to fall by 3ppt to 8.0%. The higher A&P cost for internal brand promotions resulted in slight compression in trading PBT margins by 0.8ppt to 1.7%.

Weak  FY15E  in  sight,  lowering  CNP  by  30.9%. Based  on management’s  statement  in  the  media,  we  now  assume  FY15E topline to remain flat at 2.0% growth to RM704.3m vs. our previous expectation  of  5.0% in  light  of  the  more  challenging  outlook  than previously  had  anticipated.  We  also  adjusted  EBIT  margins downward  to  4.5%  (previously  assumed  at  6.4%)  to  reflect management’s outlook on inflationary pressure and effects of GST that  are  seen  to  increase  operating  costs.  However, we  expect associate’s  contributions  to  remain  strong  at  8.0%  growth.  Thus, our FY15E CNP of RM26.2m will represent a 6.5% YoY decline.

Downgrade to TAKE PROFIT with a target price of RM1.54. We had  underestimated  the  challenging  operating  environment  and weak consumer sentiment. Following our previous report (dated 13 Nov 2014), the FBM Small Cap Index (FBMSCAP) Fwd PER has been  de-rated  to  10x,  from  11x,  as  the  market  took  a  beating. Even if we continued to assume an unchanged FY15E PER of 11x on the back of our lowered FY15E core EPS, this implies a FV of RM1.54,  which  only  offers  a  total  negative  return  of  17.4% (downside of 19.0% minus dividend yield of 1.6%) based on its last traded  price.  Furthermore,  the  11x  FY15E  PER  is  at  a  discount from its 3-year peak PER of 12x in a sector that is far from being in a bullish mode.

Source: Kenanga Research - 24 Mar 2015