Period

1Q15

Actual vs. Expectations

Net profit of RM36.8m (+44.4%) is deemed within expectations despite accounting for 35.3% and 38.9% of our in-house and streets’ estimates, respectively, as it was boosted by pre-GST front-loading activities and we are expecting weaker subsequent quarters.

Dividends

As expected, DPS of 10.0 sen (1Q14:10.0 sen) was declared. We expect total DPS of 57.0 sen to be declared in FY15 vis-à-vis 55.0sen in FY14.

Key Results Highlights

YoY, 1Q15 revenue surged 51% to RM322.0m, mainly driven by the stocking-up purchases before GST implementation while sales were also further aided by the pre-GST promotions focusing on high-value items. However, gross profit increased by a slower pace of 34% to RM87.7m on the back of higher transfer pricing to reflect the stronger USD (<70% of products imported). As a result, gross margin narrowed to 27.2%, down 3.5ppt. Meanwhile, 1Q15 net profit jumped 44% to RM36.8m, thanks to lower operating expenses (12.2% of revenue vs 15.4% in 1Q14)

QoQ, 1Q15 revenue grew 40.1% due to the reasons mentioned above. Similarly, gross margin recorded was also lower by 3.1ppt due to the higher product sourcing cost, which limited the gross profit growth to 26%. As a result, net profit surged 58.6% on lower operating expenses (12.2% of revenue vs 17.2% in 4Q14) and also lower effective tax rate of 26.4% as opposed to 28.4% in the previous quarter.

Outlook

We remain neutral on the company despite the overwhelming growth in the quarter. We had initially expected some pre-GST boost, but we believe the interests were amplified by the Group’s initiatives to encourage and promote big-ticket items.

However, with the higher FY15 product pricing in place starting 1Q15, we foresee challenges for the Group to expand or even maintain its margins. Passing through the additional costs will not be likely in view of the persistently weak consumer sentiment which is expected to be further dented by the implementation of GST.

Moving forward, we expect sales and earnings to be subdued in the next two quarters but the situation might improve toward the year-end as consumers adapt to the post-GST environment.

Change to Forecasts

No changes to earnings forecast as we do not expect the stronger-than-expected results to continue into coming quarters.

Rating

Maintain MARKET PERFORM

Valuation

We keep our Target Price of RM11.42 unchanged, based on 18x PER FY15E, which is the 3-year mean PER. The stock offers a decent dividend yield of 5.3% based on the last closing price, which we think can provide support to the share price amidst the challenging outlook ahead.

RiskstoOur Call

Better-than-expected consumer sentiment.

Source: Kenanga Research - 18 May 2015