Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM47.1m (-8.8%) was slightly below expectations matching only 45.2% and 44.6% of our inhouse and consensus’ forecasts, respectively. The negative deviation can be attributed to higher-than-expected operating costs due to higher sales incentive.

Dividends

As expected, second interim single tier DPS of 10.0 sen was declared, lifting 1H15 DPS to 20.0 sen (vs 1H14: 20.0 sen) which is in line with our expectation.

Key Results Highlights

YoY,1H15 revenue grew 25.4% to RM510.0m, mainly due to a strong 1Q15 (+40.1%) driven by front-loading activities before GST implementation and promotions focusing on high-value items. However, PBT fell 8.9% to RM63.3m despite the higher sales due to higher import costs on the back of stronger USD as well as higher sales incentives given to encourage sales. As a result, net profit declined by 8.8% to RM47.1m.

QoQ, 2Q15 revenue tumbled 41.6% to RM188.0m mainly attributed to a huge swing in purchasing by its distributors in reaction to the GST implementation. PBT margin eroded by 8.4ppt due to the higher sales incentive as mentioned above, which resulted in a 73.4% slide in PBT to RM13.3m. However, lower effective tax rate of 23.1% (vs. 1Q15:26.4%) narrowed the decline in net profit to 72.2% at RM10.2m. The huge slump in profits can also be attributed to the higher base effect due to a strong 1Q15.

Outlook

The huge swing in sales and profits in between the quarters is understandable as distributors reacted logically to the GST implementation. However, we expect the sales to normalize moving forward as distributors might replenish stocks starting in 3Q15 after stocking up aggressively in 1Q15 while consumers might also gradually adapt to the new costing environment.

However, with the higher product pricing in place starting 1Q15, we foresee challenges for the Group to expand or even maintain its margins. Passing on 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 foresee the Group to continue driving sales by encouraging its distributors with sales incentive as well as embarking on more marketing and sales activities in order to lift the weak consumer sentiment.

Change to Forecasts

We imputed higher distribution expenses and selling and administrative expenses for both FY15E and FY16E forecasts due to the reason mentioned above. As a result, FY15E and FY16E net profits were revised down by 8.8% and 8.7% respectively.

Rating

Maintain MARKET PERFORM

Valuation

Correspondingly, our Target Price is nudged lower to RM11.05 (from RM11.42). Our TP is based on an unchanged 18x PER FY15E, which implies -0.5 SD over the 3-year mean PER.

Risks toOur Call

Lower-than-expected sales and marketing activities

Better-than-expected consumer sentiment.

Source: Kenanga Research - 20 Aug 2015