Period

1Q15

Actual vs. Expectations

1Q15 net profit of RM47.2m (-9.8%) was within expectations by accounting for 21.4% and 21.7% of our in-house and consensus’ forecasts, respectively.

Dividends

None, as expected.

Key Results Highlights

YoY, 1Q15 revenue declined by 3.7% to RM429.5m due to the lower sales in Malaysia (-11.3%) which the Group attributed to the trade destocking in March ahead of GST implementation while 1Q14 was boosted by stocking-up ahead of price increase in April 2014. Operating profit dipped 11.7% to RM60.0m due to the lower sales volume and higher raw material costs on the back of stronger USD. However, stronger performance from its associate (+52.2%) helped cushion the impact, resulting in 1Q15 net profit of RM47.2m, 9.8% lower in comparison.

QoQ, revenue inched up marginally by 1.3% due to the higher sales in Malaysia (+5.2%), boosted by Chinese New Year (CNY) festival. However, higher marketing expenses in conjunction with the CNY celebration narrowed the operating margin by 3.8ppt, which in turn brought down the operating profit by 20.3%. Net profit fell by a greater quantum of 25% no thanks to a higher effective tax rate of 22.6% (vs. 16.7%).

Outlook

Moving forward, we remained cautious on the outlook of the Group with the implementation of GST starting April 2015 expected to hurt the local consumer sentiments. As such, we forecast net profit growth to be moderate at 4.1% in view of the acclimatisation and adaptation period of 6-9 months before consumer sentiment can recover.

However, we expect more aggressive marketing campaigns to be embarked in order to stimulate the consumer sentiment and the better product mix to drive the earnings growth. The strategy of concentrating in premium brands could also bear fruit as the targeted affluence groups of consumers are less likely to be influenced by the higher costs of living.

The tax claims by the customs amounting to RM56.4m (25.6% of FY15E net profit) is still ongoing and we are wary of the potential financial impact should the outcome of the lawsuit turns out to be unfavourable. However, the Group has announced plans to dispose its subsidiary earlier this month, and we expect the cash proceed of RM19.5m to partially mitigate the potential impact from the tax claims.

Change to Forecasts

No changes to our earnings forecasts.

Rating

Maintain MARKET PERFORM

Valuation

Maintain our TP of RM13.23, based on 18.5x FY15E PER which implied -0.5SD over the 3-year mean.

Risks

Unfavourable outcome of tax claims lawsuit.

Sector risk: Higher-than-expected contrabandsvolume..

Source: Kenanga Research - 26 May 2015