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
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